“Europe” and the United Kingdom in Context

Markets have been interesting (at last… it’s been dead dull for a year+ now). Over the pond in “Europe” (that somehow seems to exclude anyone in Europe who doesn’t agree to be punished by the E.U. Club) folks are running around hair on fire screaming bloody murder just because most of the population of the U.K. realized that were getting shafted and voted to get the hell out of an abusive relationship and leave “the club” (or the application of the club…)

Now markets are down, and to listen to the talking heads on the Progressive Mainly Slime Media it is the end of the world as we know it and everyone in the U.K. is now going to be punished by God (or Angela… but they repeat themselves) for such audacity.

But what’s the truth? What do markets really look like in context? First off, remember that a move of 3% in a single day is absolutely common. Not worth noting at all, really. A 6% move ought to be investigated to find out why, but almost always the answer is “it was too high and short sellers saw a chance to profit”. How can you tell? A market at the top of a run up compared to the long term trend. (Bottoms and time to buy are spikes down away from the long term trend). Both happen with Great Regularity. It is the one thing reliable about markets. They are characterized by waves and rolling prices.

Here’s a 2 year chart of EU stocks in a basket (ETF Exchange Traded Fund) named EZU

vs other ‘by country’ ETFs:
EWG Germany, EWQ France, EWU Great Britain

for comparison:
SPY S&P 500 USA , TLT long term US Govt Bonds, FXB The £, GLD Gold fund

EZU Eurozone stocks vs benchmarks of gold, S&P 500, bonds, and Britain

EZU Eurozone stocks vs benchmarks of gold, S&P 500, bonds, and Britain

This chart is from Bigcharts.marketwatch.com

First thing to notice is that TLT US Bonds is rising and has been the whole time (with the inevitable rolling aspect).
That is because The Fed has been keeping money near zero and our economy isn’t completely dead yet. Especially compared with the R.O.W. (Rest Of World). When things are hell in Venezuela, sloppy in China, and on edge in the EU, money runs to US Bonds. (Much of it Arab Oil Money… so trouble in the Middle East causes it too…)

Next, notice that the S&P 500 has been dead flat over the same period (with obligatory roll). Yes, at the end it was up 5%, but that’s just the top of a roll. Now it’s rolling back down. This is a surprise? Had it not been Brexit, it would have been ISIL, or a flood in Virginia, or a news report about China, or… They Talking Heads just pick the news of the day and assign causality. That it was “top of the roll” is why it went down.

Next, look at that stray line that breaks away from the pack about February. That’s gold. THE trade right now is “long gold” as I’d noted a week or two back. Also note that Right Now it is at the end of a one month run up (roll) so it isn’t the best time to toss new money at it. Buy a dip instead (likely next week or two). But clearly shy money is avoiding stocks and negative interest rate bonds and moving into “no currency risk” gold.

(IMHO, gold is “just another currency” and it really does have currency risk, but most folks don’t think that way.)

OK, what’s left?

That whole “Pack” is various cuts of the EU. Mostly just the big boys (Germany, France, UK). The EZU is a basket of the entire Eurozone, but is dominated by Germany and France, so no surprise that they run together.

The key point here? Being in the Eurozone has not been a big winner. “From upper left to lower right” is losing. Now these things are being measured in $US, that has been rising. But just selling out of the EU and putting that money in $US assets would have won as compared to sitting in € assets. That’s sort of the point.

As a member of the EU, the UK wanted to match the € on average (that’s the usual goal for major trade partners). As an independent UK, it can now go its own way. IMHO, it is leaving a dropping trend and can now gain strength.

Now, the indicators:

RSI was “near 80” long before the BrExit vote. That says “going down soon”. Any surprise it went down?

MACD had crossed over the zero line about 2 weeks ago and was “red on top” and “mouth down” – i.e. going to head down.

DMI was “red on top” about 2 weeks ago. ADX 20 and rising. That says “going down and accelerating”.

All these things ‘pre-vote’. IMHO this shows that the vote is just a scape goat for the downtrend and rollover from a high. From inside the EU, that downslope of 2 years is likely more of a flat. That just says that “screwing the currency” was hiding the reality. Given that the $US is being buggered with massive money printing, where’s the surprise that something dropping relative to it is maybe doing the same…

Sidebar on Greenspan: On Bloomberg, there was an interview with Greenspan. He pointed out M2 (Money supply) was rising at a steady 6% or so rate, then said that while he could not say when, that always leads to lots of inflation. Look again at that GLD line… and the FXB line…

So, to my sensibilities, it is time to do a “risk-off inflation-ready” posture. To that end, I need to end my “mostly just sitting around in $US posture”. It was fine when we were going nowhere fast and I wanted a bit of a vacation. Now it is time to get back to work. The “usual suspects” for a risk off inflation ready? FXF the Swiss Franc, GLD and SLV metals, outside of traded funds “collectables” and real estate. You know the drill if you lived through the ’70s.

In a future posting I’ll look over the REITS and metals more closely.

Generally, a full on market panic has down thrusts that last about 3 days, then drift back up over a week or two. Wash and repeat to a full on “capitulation” on very high volume at a spike shaped bottom. We are not there yet. So I’ll be doing shorter trades based on 10 day charts until a clear bottom is in. While that is happening, it is time to make a U.K. Shopping List. (Hey, it’s on sale! About 20% off!! Woo Hoo!) I don’t know much about U.K. stocks and less about those available as ADRs (American Drawing Rights – a foreign stock on a US market). So I have some homework to do.

IMHO, it will be about 3 weeks to a month to the ‘best buy’ point, but with lots of tradable ripple in between. (Exact length to depend on the EU Kommissars and what stupid they do).

The Close Up

This is a 10 day hourly chart. Good for day trading to swing trading (couple of days).

EZU vs United Kingdom and compared to SPY and TLT 10 day chart

EZU vs United Kingdom and compared to SPY and TLT 10 day chart

We have an “open down then rise off the bottom” today. So the market makers are happy to buy at this level. Likely a “good enough” entry point, but they can ‘lay off the risk’ via options, so it is sometimes the case that it goes down a bit more tomorrow, then rises mid day. That would be my target entry.

Gold spiked up, and is slowly rising into the close. Still excess demand there.

Next, notice that there is a ‘hump’ in last week. Things bounced up about 6% then for no good reason. Beware of news talking heads saying stocks or the £ are down “14% !!!!” and not pointing out it was from an up spike of 6% last week. This is a classic ‘whipsaw’ trade event where professional traders were caught out on the wrong side, and panicked hard to the other side on news.

To the indicators:

RSI is “near 20” (actually on it) and that says “trade ending soon”. As that would have been a “shorting” trade, I’d expect to see short covering starting this afternoon into tomorrow. I.e. market maker has been buying today, so closes low, open higher tomorrow. Perhaps even a gap up open so they lock in the gain from what they had to buy today. (Yes, I know that conflicts with what I said above. That was my ideas this is what the indicator says… they are different.)

MACD looks to be approaching a crossover. Likely a ‘buy point’ this afternoon. It CAN just ‘go flat’ in a slow steady decline phase, but the price action looks static, not falling. (Remember this is an ETF traded in US markets when the UK underlying may be closed).

ADX is near 50, so very high strength to the move, yet DMI is “red on top but about to cross” that happens when the trade is ending. Not quite blue on top, but headed that way. Risky and most potential gain trade is ‘buy now’, less risky but OK trade is ‘wait for it’… (on the 15 minuted chart it has already crossed over, so for a day trade it is a go, but for folks not watching the trade every 15 minutes… it’s a wait…)

So overall, this chart is saying “time to buy or soon”. For a day-or-two swing trade.

Personally, I’m still feeling lazy, so will likely wait for tomorrow to put on a trade. Things rarely shoot up off an event like this, so I’d expect there’s time for a ‘good enough’ entry. Remember there is a 3 day ‘settlement period’ so folks who “shorted” on Friday, don’t get the money to buy back until tomorrow… (Deep Pockets don’t care, but many traders do). It would also be best to look directly at the Eurozone tickers to pick the buy as that avoids the ETF tracking errors and timezone issues. Remember I’m at the exactly wrong end of the DateLine for this market…

In Conclusion

I’m going to be “piecemeal” on the financial postings for a while. It lets me ‘get it out quick’ for any given item even though there isn’t a big picture context.

This posting is about the Eurozone / UK markets only (though measured against the USA). In future postings I’ll be looking directly at USA stock markets, metals, and other segments.

IMHO, it is almost “time to be among them”, and the long 2 year drought of USA action is nearing an end. It looks like an inflation-soon bias is needed (bonds roll over then, stocks more sideways) but with significant “news driven trades” available as Brexit matures and with a whole lot of “Central Bank Did What?” risk. News risk.

For right now, there’s a firesale price on the UK, and to some extent EU. I’d bet on the UK first, as it is getting a world of freedom that is being under priced in their markets. The EU will continue (and accelerate) the downtrend in that chart above as they continue to accrue burden from southern tier economies, but minus the UK profits. Having a pair trade of “long UK short EU” over a 3 year time horizon ought to be a win, IMHO, but long LEAPS like that are hard to find.

So that’s my take on things at the moment. Remember, as usual, none of this is personal investment advice to anyone. It is only my ideas about what I want to do with my money. You make up your own mind for you. This is free commentary, and worth everything you paid for it…

Subscribe to feed

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money, World Economics and tagged , , , , , , , . Bookmark the permalink.

16 Responses to “Europe” and the United Kingdom in Context

  1. Oliver K. Manuel says:

    Consensus scientists, national academies of sciences and globalist politicians can begin to rebuild public trust by admitting the falseness of LIES Immediately after WWII:

    1. The Sun IS NOT made of, nor powered by, H-fusion; The Sun and other stars make and discard H to interstellar space.

    2. The powerful force between neutrons IS NOT attraction, as Weizsacker’s nuclear binding energy equation claims; The powerful force between neutrons is repulsion that causes cores of heavy atoms, ordinary stars, and galaxies to fragment and/or emit neutrons, as Aston’s nuclear packing fraction showed in his 1922 Noble Prize Lecture.

  2. Frank Mosher says:

    good analysis. A higher open Tuesday implies margin calls no longer an issue? Preferred stocks (PFF) have sold off sharply vs. TLT. With a beta of around .23, maybe a spot to start some accumulation, both for short term bounce and longer term also. I too have been waiting for the BLS to recognize that inflation is not anywhere near zero, but with non M-1, M-2 money supply growing nicely, it appears that individuals are dealing with a low return market by increasing savings for retirement. I enjoy your perspective. fm

  3. Larry Ledwick says:

    I think the key thing to keep in mind about the M01 and M-2 numbers is the velocity of money also impacts if or how bad any inflation might be from growing money supply. If the velocity of money is falling (people holding cash rather than spending) it can for a while cancel out increased money supply. Of course when all those cash hoarders find something to buy and start burning their money supply then it becomes time to pay the piper.

    In the US velocity of money has been sinking for a long time canceling out all the money dumping by the FED.

    https://fred.stlouisfed.org/series/M2V

  4. omanuel says:

    World leaders perhaps conceded BrExit, in a futile effort to save CSExit & NASExit, . . .

    public disintegration of Consensus Science and National Academies of Sciences

  5. E.M.Smith says:

    @Larry: Yes!

    In fact, I’d assert it is the liquidity trap that is keeping inflation low for now. With negative interest rates, might as well let your cash sit (especially for global folks with less strong currency than $ US.

    Once interst rates start to rise, this ought to reverse with rapid V and rising inflation.

    Puts the fed in a bit of a box…

  6. Ralph B says:

    I furrow my eyebrows wondering why markets react the way they do. In the UK nothing Financially has changed, if anything they have more free cash now since they don’t have to support the EU. I would have thought the euro should tumble since Germany exports more to the UK than vice versa. I am thinking of buying pounds because I believe once people get over their panic and think somewhat rational again pounds should snap back.

  7. Steve C says:

    @EM – You say the UK “… is getting a world of freedom …”. Not yet, it’s not. Nothing whatever changes until the UK officially requests the implementation of Article 50, the only way provided in the EU Rulebook for starting the 2-year process of leaving the Project. And all we have heard from Westminster for four days now is humming and hahing about “not rushing things” – even from “Leave” campaigners like Boris Johnson. (There are already suggestions that Johnson was a false flag “leaver”, installed in “Leave” to keep things safe for international banking. This is highly plausible.)

    There are nine weeks now before Cameron steps down, to be replaced by (we devoutly hope) a less EU-beholden PM to initiate and run exit negotiations. Nine whole weeks for Cameron’s mateys in the Great Global Economics faction to clean out any value that’s left in this country – if they can find anything they haven’t helped themselves to already. “Our” government is as dedicated as ever to the wellbeing of the international banking and corporate cartel, it appears.

    You have of course noticed the gibbering Remainder voices demanding another referendum (A fascinating process btw. Seems they have in their collection at least 25,000 “signatures” purporting to come from N. Korea, and over 2,000 from Antarctica, to name but two. These amateur script writers!). Sadly, we now have calls from the same children to disenfranchise everyone older than x years, where x depends on the source you’re reading. Their “understanding” of democracy doesn’t take account of we old’uns having decades of experience in seeing through politicians’ lies, of course, but then we all know what the NWO think of democracy. This referendum has certainly lifted a few stones and showed us a little more of what lies beneath.

  8. Frank Mosher says:

    IMHO, nothing has really changed, except excellent buying opportunities in stocks. My choice is high quality preferred (PFF) and some utilities, hedged by selling long treasuries, as the spread wound out wildly. The ” money printing” inflation scare reached a high level in 2010 thru 2011, with gold soaring. Turned out to be hype only. Long bond sold Nov. 2010 paying 4.25 coupon currently at $ 1410 each. 42.50 per year for 5.5 years equals $233, plus cap gain of $ 410 give total return of $ 643. This for a AAA security that cost $1000.Not bad. This potential ” hot ” money that shows up in non M-1, M-2, i.e. savings accounts, money market etc. Demographics won’t help. What will this ” hot” money be spent on? People nearing retirement are careful spenders. Houses? Unlikely. Luxury cars? Unlikely. Expensive vacations? Maybe.Pundits in 2010 and 2011 were saying ” Shorting the Bond market is the trade of the Century”. No Brainer. Didn’t workout . In fact they lost their shirt. Being short bonds is expensive, as interest is calculated daily. You can literally bleed to death. IMHO, we have been in an inflationary cycle for several years. The Feds have a vested interest in understating CPI, as tax tables are indexed to inflation, so understating increases revenue. Likewise for Social Security and other transfer payments. Social Security is CPI adjusted, so understating inflation helps revenue. I wouldn’t rule out some disinflation or outright deflation. I don’t see any real value of ” velocity” of money. Was very trendy in late 70s and early 80s, but i don’t see any correlation that is of value in investing. When we see M-2 less M-1 decelerate or go negative, money will probably stop going into stocks or bonds, Just my humble opinion, and it is worth what you paid for it. fm

  9. E.M.Smith says:

    @Ralph B:

    I find it very useful to look at it from the market maker perspective. They must “make a market” but get to set ‘at what price’. Along comes news of Brexit, so a threat to UK Banks. The MM knows a bunch of folks will want to sell. Worse, he knows deep pocket trade houses like Goldman will be shorting to create panic. So he opens bank stocks down 10% where making money is highly likely. Loads up cheap, then as sales slow, puts up prices to ‘only’ 8% down and sells out to institutions for a 2% gain.

    Essentially don’t think of buyer and seller, think of buyer, market maker, and seller in a 3 corner trade. So market maker puts price way down when sellers dominate and the MM is forced to hold inventory; and the MM puts prices up high when selling out the inventory a few days later.

    Per what changed: Emotional state. People are emotional irrational beings. The MM is paid to buy when sellers panic and sell when tney are manic.

  10. E.M.Smith says:

    @SteveC:

    Watched parliment on CSPAN tonight. Despite the veneer of ‘we must respect the vote’, I got the creepy feeling the intent of the ‘negotiation’ will be opposite the will of the people… keeping all the EU rules and ‘free movement of people’ in exchange for market access… just giving up a vote for lower dues and calling it an exit.

    Unclear on the concept of escaping the clutches, trading with the wider world, and UK for her citizens first.

    The fretting was over preserving as much as possible of what was, not building and embracing what could be, or what the Citizens wanted.

    UKIP needs to put their folks at the negotiating tables to prevent a faux exit.

  11. E.M.Smith says:

    @F.M.

    Got a ticker o that preferred? It’s an interesting strategy.

    Money velocity matters for macro stuff, investing not so much. It is a diagnostic for understanding macro changes, that understanding feeding the micro actions. So V in a context, when it may mean different things for the same V in different contexts.

    For example, V headed to zero in a liquidity trap at 0% interest says too much Keynesian Fix too long, stop with the Keynesian fix. V headed to zero with a financial panic and 1% inflation with 3% growth says flood liquidity for the duration of the panic.

    From an investor POV all you want to know is liquidity trap, or panic, and the right fix being done… but if you look at loose money policy without the V knowledge it isn’t helpful. (I.e. loose money policy with rising V is OK at the start of a recovery, wrong at 4% growth)

  12. Frank Mosher says:

    Symbol PFF. Nice cross section, but slightly more financials than i would prefer. Excellent liquidity, low beta, as expected, and monthly dividends around 5.7%. Cap gains distributions in Dec. Management fee higher than i would like, but can’t have everything. good trading vehicle. Do you remember 70s and early 80s when the money supply figures came out Friday p.m. (1:30 here on west coast) Those numbers moved the market enormously. More than any other data. An employee of the Fed was busted for giving heads up to his friends by moving the window shade up or down, Also by a lot or a little. Of course those were the days when Monetarist theory was at it’s apex. Univ. of Chicago, Milton Friedman, etc. Fed under Volker targeting money supply. Changed under Greenspan to targeting interest rates, as they still do. I believe Money Supply is a misnomer. Maybe should be Money Demand. Money is created by actions on the demand side,i.e. Joe Blow applies and receives a loan. On a side note, i don’t believe anything will come of the Brexit vote. The political class could not care less what the common man wants. Elitism at it’s very worse. fm

  13. Terry Jay says:

    For another view that chicken little may be clutching the wrong pearls
    http://scottgrannis.blogspot.com/2016/06/brexit-panic-progress-report.html
    A slightly different perspective that the world is not ending.

  14. oldbrew says:

    The stock market computer trading algorithms must have run out steam…

    ‘FTSE 100 erases post-Brexit losses as buying bonanza fuels rebound’
    http://www.telegraph.co.uk/business/2016/06/29/ftse-set-to-open-higher-as-post-brexit-rally-gains-momentum/

    The UK pound is still a bit down on last week though.

  15. Larry Ledwick says:

    Just harvesting profits by buying low and selling high. Big players probably waited for the panic bottom and are now grabbing the deals, then they little guys will rush to catch the band wagon and when the prices get back near normal the big players will sell into the buying frenzy.

    That’s my guess.

Anything to say?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s