ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Feb
13

T2108 Update (February 12, 2016) – The Latest Oversold Period Ends With A JP Morgan Chase Bottom

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 23.0% (ends a 1-day oversold period)
T2107 Status: 15.2%
VIX Status: 25.4
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #1 over 20% (ends 1 day oversold and under 20%) (overpriod), Day #29 under 30%, Day #45 under 40%, Day #49 below 50%, Day #64 under 60%, Day #405 under 70%

Commentary
FINALLY. The market delivers a more typical oversold period. Perhaps, just maybe, market sentiment is starting to turn. In deference to market hope, I focus more on the positives in this post.

“Oversold” trading conditions occur when T2108 drops below 20%. T2108 quantifies the percentage of stocks trading below their respective 40-day moving averages (DMAs). The typical oversold period lasts just one or two days. T2108 closed on Friday at 23.0% and left behind a 1-day oversold period.


This frequency (distribution) chart for oversold duration shows that over half of oversold periods last just one or two days.

This frequency (distribution) chart for oversold duration shows that over half of oversold periods last just one or two days.



Mean and Median Duration Below Given T2108 Threshold

Mean and Median Duration Below Given T2108 Threshold


The T2108 Trading Model relies on the short-lived nature of oversold periods for its biggest successes. This behavior explains why I prefer the aggressive strategy to jump right into the pool as soon as T2108 dives into oversold territory. Since August, the market has twisted and churned through some intense oversold periods with sellers maintaining a lot of influence and control. The more intense oversold periods require a secondary strategy that includes triggering subsequent trades off the volatility index, the VIX. When the VIX surges during an oversold period, invariably, a bottom is at hand. This year’s oversold periods have not experienced true surges. Instead, bottoms have occurred at or near resistance for the VIX. This resistance sits (coincidentally?) at the intraday high from 2012.


The VIX has consistently failed to push through resistance this year.

The VIX has consistently failed to push through resistance this year.



ProShares Ultra VIX Short-Term Futures (UVXY) gaps down along with the drop in volatility.

ProShares Ultra VIX Short-Term Futures (UVXY) gaps down along with the drop in volatility.


The chart of the VIX shows that the August Angst delivered a true volatility surge. It also sets the bar for the next true surge in volatility. Note that pushes well above the upper-Bollinger Band (BB) are sufficient to define a true surge.

The frequency of the oversold periods since August has presented another challenge. Trades coming out of the oversold periods have generally become unsustainable. Traders have had to apply quick triggers to lock in profits. I have increasingly considered more bearish positions outside of oversold periods. Coming out of this latest oversold period, the S&P 500 (SPY) is barely trading off 2-year lows. In other words, these oversold periods are inflicting steady damage on the index. The failure of buyers to sustain momentum has provided sellers the opportunity to sink the index ever lower. Since December, each oversold period has started with the S&P 500 trading at a lower level.


The S&P 500 is still breaking down.

The S&P 500 is still breaking down.



The NASDAQ is still trapped in a downward-trending channel as it struggles to print a bottom.

The NASDAQ is still trapped in a downward-trending channel as it struggles to print a bottom.


This year started with a vicious downtrend channel for the S&P 500 and the NASDAQ. A declining 20DMA quickly capped the subsequent rally out of oversold conditions for both major indices. Coming out of the last oversold period, I had targeted the 50DMA as resistance before the next oversold period. Now, I can only look to the 20DMA as a first upside target or around 1900 on the S&P 500.

The currency pair AUD/JPY – the Australian dollar (FXA) versus the Japanese yen (FXY) – has well-mapped the on-going deterioration in market technicals. AUD/JPY last peaked in May right along with the S&P 500. The 50DMA and 200DMA have alternated as stiff resistance for the currency pair. AUD/JPY printed an impressive recovery from the latest lows, but buyers have a long way to go to prove that move did not completely exhaust them.


AUD/JPY is attempting to print a steep bottom at 3 1/2 year lows.

AUD/JPY is attempting to print a steep bottom at 3 1/2 year lows.


The most intriguing evidence of a bottoming underway comes from the financial sector. Of course, this week, I finally turned my attention to using the bearishness in this sector as a complement to my set of hedges against bullishness. Jamie Dimon, CEO of JP Morgan Chase (JPM), must have heard me. My posting was clearly his signal to step up and load up on shares. Dimon purchased a cool $26.7M worth of shares on February 11, 2016. The news sent JPM gapping up to a whopping 8.3% gain that neatly placed the stock right back in the middle of the churn that has defined trading since mid-January.


Did CEO Jamie Dimon ignite a major bottom in JP Morgan Chase (JPM)?

Did CEO Jamie Dimon ignite a major bottom in JP Morgan Chase (JPM)?


More importantly, the move left behind what technicians call an abandoned baby bottom. This pattern sets up a major bear trap and the potential for a major bottom. The first move is a gap down that ignites fear and panic: weak hands dump stock and shorts chase. JPM gapped down on February 11th to a 4.5% loss. The subsequent gap up delivered an instant loss to bears and started the pressure to cover. Holders who sold in a panic the previous day feel the pressure to buy back out of fear of getting left behind. This abandoned baby bottom is particularly severe; the 8.3% gain may have already absorbed the majority of the buying panic. This bottom now serves as a VERY important line in the sand for bears and bulls. I have to assume the bulls have won until sellers at least manage to close the gap up.

I will never forget how Dimon’s $17M purchases of JPM shares in late July, 2012 marked a major bottom. At that time, Dimon boosted his ownership in the bank to 18%. I jumped into the stock quickly but also took profits too quickly several weeks later. In three years, JPM doubled in value. I am NOT saying the same outcome lies ahead, but I definitely put the bearish corners of my brain on notice.

In the last T2108 Update, I noted that I held onto my Financial Select Sector SPDR ETF (XLF) puts despite the big gap down and downdraft. I am continuing to hold the puts as an important hedge with an expiration in March.


Dimon's major insider buying reverberates throughout the financial sector. Financial Select Sector SPDR ETF (XLF) prints its own abandoned baby bottom.

Dimon’s major insider buying reverberates throughout the financial sector. Financial Select Sector SPDR ETF (XLF) prints its own abandoned baby bottom.


An abandoned baby bottom in the financial sector coming out of an oversold period presents a very powerful signal. Despite my growing wariness, I have to stick to the rules and assume this is a major bullish sign until sellers prove otherwise. I am putting a complete freeze on further bearish positions and sticking to the bullish side for future trades. This includes any subsequent dips into oversold territory.

One major insider purchase that has not received vindication is in Wynn Resorts Ltd. (WYNN). The stock soared on Friday by 15.8% in post-earnings trading, but the stock is still below the close on the day news went out that CEO Steve Wynn had loaded up on 1M shares. Additional buying interest from here would finally mark a potential turn in sentiment with a first upside target at declining 200DMA resistance around $79. Otherwise, WYNN offers a cautionary tale for automatically chasing insiders who use their riches to buy more of their company’s stock.


Wynn Resorts Ltd. (WYNN) returns to flat for 2016 but has yet to add momentum to Wynn's insider purchase in December.

Wynn Resorts Ltd. (WYNN) returns to flat for 2016 but has yet to add momentum to Wynn’s insider purchase in December.


With oil surging 12% on Friday for its biggest one-day (intraday) percentage gain since 2009, commodities are also in major focus. Rumored production cuts presumably drove this latest buyer’s panic. However, this is yet one more classic example of bear market trading action where traders over-react to every little tidbit of rumor. Let’s get those production cuts before we get too excited. United States Oil (USO) barely benefited from the surge, managing only to print a 4.2% gain. A bigger move would have given me confidence that USO approximately confirmed the bottom from January. So far, this latest bottom in USO looks set to end a LOT sooner than I expected.


USO barely benefits from the big one-day run-up in oil and leaves a confirmation of a bottom in doubt.

USO barely benefits from the big one-day run-up in oil and leaves a confirmation of a bottom in doubt.


Until some real evidence shows up of a turn in commodities, I am staying in fade the rally mode outside of oil. Accordingly, I used the big 7.2% move in BHP Billiton Limited (BHP) to triple down on my put options on the stock. I hit March expiration to increase my hedge duration and give enough runway for over-reactions to fizzle out.


BHP Billiton Limited (BHP) jumps toward declining 50DMA resistance again.

BHP Billiton Limited (BHP) jumps toward declining 50DMA resistance again.


The commodities I REALLY like here are gold and silver. SPDR Gold Shares (GLD) looks better than iShares Silver Trust (SLV). More on these another time.

— – —

For readers interested in reviewing my trading rules for T2108, please see my post in the wake of the August Angst, “How To Profit From An EPIC Oversold Period“, and/or review my T2108 Resource Page.

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
U.S. Dollar Index (U.S. dollar)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).
IBB (iShares Nasdaq Biotechnology).


Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO call options, long SSO shares, long SVXY shares, long UVXY puts, long TLT, long BHP put options, long XLF put options, short AUD/JPY, long GLD

Feb
12

T2108 Update (February 11, 2016) – Oversold and Overwhelmed

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 17.1% (1st oversold close after 3 straight days dipping to or below oversold)
T2107 Status: 12.7%
VIX Status: 28.1 (overhead resistance held yet again)
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #1 under 20% (oversold day #1), Day #28 under 30%, Day #44 under 40%, Day #48 below 50%, Day #63 under 60%, Day #404 under 70%

Commentary
I am not surprised that yet another oversold period has arrived; T2108, the percentage of stocks trading below their respective 40-day moving averages (DMAs) dropped to 17.1%. I AM surprised (and disappointed) that the S&P 500 (SPY) never even made it close to overhead 50DMA resistance as I had expected would happen before the next oversold period. The trading action resembles more and more a bear market as sellers persistently overwhelm buyers and crowd out rally attempts. The frequency of oversold periods continue pulling the trading action downward.


The S&P 500 closes at a fresh 2-year low as T2108 drops into oversold conditions.

The S&P 500 closes at a fresh 2-year low as T2108 drops into oversold conditions.



The NASDAQ (QQQ) looks ready to launch a fresh wave of selling as bears weigh heavily.

The NASDAQ (QQQ) looks ready to launch a fresh wave of selling as bears weigh heavily.


Once again the volatility index was somehow unable to close with a break of upper resistance from the intraday high in 2012. I would normally consider these failures indicative of underlying bullishness. However sellers have so far been too effective at squashing rally attempts on the S&P 500. Moreover, ProShares Ultra VIX Short-Term Futures (UVXY) still managed to print its highest close since October. As a result, the pre-Fed, anti-volatility trade failed miserably this time around.

U.S. Federal Reserve Chair Janet Yellen did not provide the market with the typical assurances that help drive volatility down. Instead, she mused about the possibilities of negative interest rates, insisted the Fed is still ready to hike rates this year, and did not yield to the market’s clear expectations that rate hikes are completely off the table for 2016. Still, I decided to reload one more time on UVXY put options and added to shares on ProShares Short VIX Short-Term Futures (SVXY) given the start of oversold trading conditions. I am waiting on the next round of call options on ProShares Ultra S&P500 (SSO).


The VIX keeps failing at resistance. How much longer until some kind of resolution up or down?

The VIX keeps failing at resistance. How much longer until some kind of resolution up or down?

UVXY made an impressive breakout despite volatility's stalling action. Has it diverged too far or is it leading VIX higher...?

UVXY made an impressive breakout despite volatility’s stalling action. Has it diverged too far or is it leading VIX higher…?


This oversold period is now the third occurrence in just two months and the seventh in just 6 months. The gravitational pull on the market is quite clear. I have chronicled the accompanying technical deterioration in the market along the way so much it is a wonder I am not an incurable bear at this point! I have chosen to focus on the buying opportunities presented by the oversold periods because I have a well-defined model for doing so. I have since learned that my model has a huge gap in dealing with an on-going overall deterioration in the market. I have tried to compensate by initiating bearish (hedging) positions all the way to the edge of the oversold period and holding onto bearish positions for longer periods of time through the oversold period. However, as the market’s condition worsens, these adjustments are proving insufficient to cover the downside of bullish positions.

I have recently dialed up the aggressiveness of the bearish positions as another adjustment. My first success came on my favorite hedge against bullishness, Caterpillar (CAT). I closed out two fistfuls of put options on today’s gap down. As I indicated in my last T2108 Update, I have finally hopped on the downtrend in financials. I am still holding onto my two fists full of XLF put options.


Financial Select Sector SPDR ETF (XLF) gaps down to a fresh 2 1/2 year low. A new wave of selling looks ready to begin.

Financial Select Sector SPDR ETF (XLF) gaps down to a fresh 2 1/2 year low. A new wave of selling looks ready to begin.


I also held onto put options on Netflix (NFLX) that became profitable. I am sticking with a large put position against BHP Billiton Limited (BHP) that I now like even more after Rio Tinto (RIO) slashed its dividend. I even initiated a new set of put options on Tesla Motors (TSLA) as a fade on post-earnings buying. True to the spirit of the market’s technical deterioration, TSLA faded hard from its intraday highs. If it behaves like so many other trading favorites in post-earnings action, sellers will soon resume their domination.


Tesla Motors (TSLA) fades hard from the top of the current downward trending channel.

Tesla Motors (TSLA) fades hard from the top of the current downward trending channel.


In contrast to these bearish positions, I held onto my bullish trade of the week too long: Google (GOOG). My position went into the green twice but still I held on for more convinced more follow-through would be forthcoming. GOOG now looks ready for a retest of 200DMA support.


Google (GOOG) struggles to stabilize after a massive post-earnings fade. A 200DMA retest looks in play now.

Google (GOOG) struggles to stabilize after a massive post-earnings fade. A 200DMA retest looks in play now.


Market sentiment has soured so much that the iShares 20+ Year Treasury Bond (TLT) has gained 10.9% year-to-date. The buying of government bonds has been near relentless and runs in stark contrast to the Fed’s effort to “normalize” interest rates. The year-to-date trend shown in the below chart is definitively guided by the upper-Bollinger Bands (BBs).


The iShares 20+ Year Treasury Bond (TLT) has put on an impressive performance in 2016 as the market completely ignores the Fed's attempt to being rate normalization.

The iShares 20+ Year Treasury Bond (TLT) has put on an impressive performance in 2016 as the market completely ignores the Fed’s attempt to being rate normalization.


In currency markets, my favorite sentiment indicator remains the Australian dollar (FXA) versus the Japanese yen (FXY) or AUD/JPY. Overnight Wednesday and into Thursday morning, the Japanese yen strengthened significantly and the Australian dollar weakened as fears reached a fever pitch. AUD/JPY sharply recovered just ahead of the U.S. trading session and somehow managed to hold its ground from there.


AUD/JPY recovers sharply from a large sell-off. to new 3 1/2 year lows. Without quick follow-through, more lows are likely on the horizon.

AUD/JPY recovers sharply from a large sell-off. to new 3 1/2 year lows. Without quick follow-through, more lows are likely on the horizon.


Going forward, I am assuming this latest oversold period will last around 10 days as the “debt” owed from the last oversold period. If T2108 falls into single digits again, all bets are off, and I will need to figure out a new estimate. If this oversold period acts more like a typical oversold period by lasting just one or two days, then I will look forward to additional oversold periods in coming weeks.

— – —

For readers interested in reviewing my trading rules for T2108, please see my post in the wake of the August Angst, “How To Profit From An EPIC Oversold Period“, and/or review my T2108 Resource Page.

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
U.S. Dollar Index (U.S. dollar)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).
IBB (iShares Nasdaq Biotechnology).


Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO call options, long SSO shares, long SVXY shares, long UVXY puts, long TLT, long TSLA puts, long GOOG call options

Feb
11

Rio Tinto Admits Severity of Commodities Collapse By Slashing Dividend

written by Dr. Duru
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It finally happened. Rio Tinto (RIO), a major producer of commodities like iron ore, has started to back off its generous dividend payout policy.

In its latest earnings statement, RIO announced its total dividend for 2015 will come to 215 U.S. cents per share, the same as it paid out in 2014. Over the past 5 years, RIO reported a payout to investors of over $25B in dividends. However, RIO can no longer afford such generosity. Going forward, the company slashed the “intended” payout almost in half and warned investors that the dividend is now subject to change to align with business realities:

“…with the continuing uncertain market outlook, the board believes that maintaining the current progressive dividend policy would constrain the business and act against shareholders’ long-term interests. We are therefore replacing the progressive dividend policy with a more flexible approach that will allow the distribution of returns to reflect better the company’s position and outlook. For 2016, we intend that the full year dividend will not be less than 110 US cents per share.”

The qualifier “intend” is important. It emphasizes the flexibility RIO has put in place to change the dividend as needed. Given the current trend and trajectory, I am assuming that this dividend will continue to get cut until, perhaps, it finally drops to zero.

The commodities market generally peaked in 2011. The path to a bottom has been excruciatingly long. RIO’s change in its dividend policy brings the collapse one step closer to a bottom. RIO has finally started to acknowledge the true severity of this collapse. Once its dividend goes completely to zero – or some major goes to zero (or bankruptcy?) – the market will probably be about as close to a good risk/reward buy as it can get.

The chart below shows the on-going sell-off in RIO in recent months. It is overlayed with the price of iron ore.


Rio Tinto (RIO) has fallen to near 7-year lows as the collapse in commodities continues to take its toll.

Rio Tinto (RIO) has fallen to near 7-year lows as the collapse in commodities continues to take its toll.


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: no positions

Feb
10

Forex Critical: Key Currency Charts for February 11, 2016

written by Dr. Duru
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Currencies are a transmission mechanism. Since the financial crisis, central banks have become increasingly adept at manipulating them as agents of monetary policy. Traders who ignore currencies may have critical blindspots as stock markets twist and turn through currency transmissions. From time-to-time, I will post “Forex Critical” to highlight currency charts that I believe are of particular interest because of an urgent and meaningful technical setup. These currency pairs will typically sit at important technical junctures, trends, and/or critical breakdowns and breakouts.

I kick-off this series in the wake of Congressional testimony from the U.S. Federal Reserve’s Chair Janet Yellen. Currency markets behaved in a way that suggests traders did not quite know what to make of Yellen’s admission that rate hikes may need to slow while also standing firm with data-driven decision-making.

The currencies of interest: the U.S. dollar (DXY0), the Japanese yen (FXY), the British pound (FXB), and the Canadian dollar (FXC).

The U.S. dollar index rallied right to resistance at its 200-day moving average (DMA) only to fall back to a fresh 4-month closing low. This trading action confirms the recent breakdown and makes the dollar increasingly unattractive. “Policy divergence” is waning more and more as an important trading theme. To-date, some pundits (like Jim Cramer of CNBC and TheStreet.com) have pleaded for a weaker U.S. dollar to help boost the fortunes of American companies and the stock market. The recent weakness has not helped the stock market one bit so far..


The U.S. dollar index fails to recover from the recent 200DMA breakdown.

The U.S. dollar index fails to recover from the recent 200DMA breakdown.


This chart of the U.S. dollar index is important context for the remaining charts…

The British pound is starting to turn the corner against the U.S. dollar (GBP/USD). I recently wrote about the Bank of England’s path to rate hike interruptus in “The Bank of England’s Recent Retreat On Rate Hikes (A Blueprint for the Fed?).” Governor Mark Carney’s official acknowledgement of what the market had long suspected served as a bottom. While GBP/USD is currently struggling to break through 50DMA resistance, the 20DMA has turned the corner AND the upper-Bollinger Bands (BBs) channel is decidedly pointed upward. Momentum is slowly but surely turning. A newly resurgent British pound will likely face more and more dovish talk from the Bank of England.


GBP/USD may finally be starting a LONG overdue relief rally.

GBP/USD may finally be starting a LONG overdue relief rally.


Even as oil fights off fresh multi-year lows, the Canadian dollar has notably stopped weakening. The BIG 50DMA breakdown on February 3, 2016 for USD/CAD marked a significant and meaningful move that confirmed the recent top. Both BB channels are pointing downward as the 20DMA is as well. The 50DMA looks ready to provide a definitive test of the next direction for USD/CAD. I will only return to trading USD/CAD on its overall uptrend, if USD/CAD climbs atop the high of the big breakdown day. Until then, I am assuming the next big move for USD/CAD is downward.


USD/CAD may have finally peaked for a while as the currency pair has descended very sharply from its recent highs.

USD/CAD may have finally peaked for a while as the currency pair has descended very sharply from its recent highs.


My favorite chart is the British pound versus the Japanese yen (GBP/JPY). I zoomed out to weekly view to make clear the major breakdown underway. At the time of writing, GBP/JPY sits at levels last seen in late 2013. From here, just a little bit of a push could send GBP/JPY descending quite a long way down before some kind of bottom occurs. This pair combines the stubbornly weak British pound with the stubbornly strong Japanese yen: a match made in downsides.


GBP/JPY looks like it is printing a major top.

GBP/JPY looks like it is printing a major top.


The U.S. dollar versus the Japanese yen is the chart I do not want to believe! Policy divergence had me convinced that USD/JPY in particular would inevitably begin a new phase of upward trending. The Bank of Japan went negative, experienced a few days of yen weakness, and then watched as the yen resumed its strength. On the daily chart (not shown), USD/JPY crashed through presumed support at 115 or so, the bottom of a 15-month or so trading range. This breakdown flashes a fresh red warning signal even brighter than the one I flashed to begin the year. USD/JPY could slide swiftly from here because little to no “natural resistance” exists between here until 105 and then 100! (This is true on the weekly AND the daily).


USD/JPY is breaking down swiftly.

USD/JPY is breaking down swiftly.


Source for charts: FreeStockCharts.com

I have a mixed trading strategy right that is in transition to more consistency. I am short GBP/JPY and long both GBP/USD and USD/JPY. GBP/USD started as a hedge against my dollar bullishness, but it failed relatively miserably in that role until recently. GBP/JPY has been a welcome add to the mix and relieved some of the pain of long USD/JPY. The time is nearing to greatly expand the short on GBP/JPY and scale down USD/JPY. USD/CAD is an intriguing intraday play that I prefer to short given my current assumption 50MDA resistance will hold. A breakout would swiftly return me to riding the USD/CAD uptrend.

Be careful out there!

Full disclosure: long FXC, short GBP/JPY, long USD/JPY, long GBP/USD

Feb
10

Housing Market Review – Crossroads: Past Strength Versus Nervous Future (January, 2016)

written by Dr. Duru
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The last Housing Market Review covered data released in December, 2015. At the time, I saw the market coiling like a spring. Instead of springing forth, housing market stocks are in big retreat. Recession fears likely have a lot to do with the declines. The iShares US Home Construction ETF (ITB) is now down a gut-wrenching 18% year-to-date. ITB trades at levels last seen October, 2014. The S&P 500 (SPY) is trading at the same relative level, but it has “only” declined 9% year-to-date.


iShares US Home Construction (ITB) has had a very rough start to the year even in the wake of relatively good housing data.

iShares US Home Construction (ITB) has had a very rough start to the year even in the wake of relatively good housing data.


Source: FreeStockCharts.com

Ironically, the housing data for 2015 that preceded ITB’s plunge set post-recession records across the board…

New Residential Construction (Housing Starts) – December, 2015
Privately owned housing starts for 1-unit structures came in at 768,000. The November 1-unit starts were revised upward to 794,000 and became the new post-recession record. This beat out the previous record of 758,000 hit in July, 2015.


Housing starts for 1-unit structures continue a volatile upward trend that launched in late 2014.

Housing starts for 1-unit structures continue a volatile upward trend that launched in late 2014.


Source: US. Bureau of the Census, Privately Owned Housing Starts: 1-Unit Structures [HOUST1F], retrieved from FRED, Federal Reserve Bank of St. Louis, February 9, 2016.

The 6.1% year-over-year gain and 3.3% month-over-month drop are consistent with the mixed picture from the confidence of home builders (see below). The Northeast led the regions with a 25.0% year-over-year gain. The West and the South followed with 10.4% and 10.0% gains respectively. The Midwest lagged again, this time with a very large 18.9% drop. The poor performance from the Midwest stands in stark contrast to the slowdown/drop I keep expecting to see in the South region because of Texas.

The solid end to the year selaed the deal on the strongest full year since the financial crisis and recession. Of course, starts are still at recessionary levels, but the trend and momentum continue to be encouraging.


2015 was a strong post-recession year for housing starts, but this annual view shows the historic weakness of the recovery.

2015 was a strong post-recession year for housing starts, but this annual view shows the historic weakness of the recovery.


Source: US. Bureau of the Census, Privately Owned Housing Starts: 1-Unit Structures [HOUST1F], retrieved from FRED, Federal Reserve Bank of St. Louis, February 9, 2016.

New Residential Sales – December, 2015
New single-family home sales hit 544,000, a robust 9.9% year-over-year gain and an impressive increase of 10.8% over November’s sales. The turn-around in the downtrend from the 2015 peak came as I projected in the last Housing Market Review.


New home sales have printed an impressive late year breakout from the downtrend that started with the January, 2015 peak.

New home sales have printed an impressive late year breakout from the downtrend that started with the January, 2015 peak.


Source: US. Bureau of the Census, New One Family Houses Sold: United States [HSN1F], retrieved from FRED, Federal Reserve Bank of St. Louis, February 9, 2016.

The strong uptick in sales punched new home sales inventory from 5.7 months at the current sales rate to 5.2 months. Six months is typically considered balanced. The Midwest sticks out with a 38.9% year-over-year gain in sales which stands in stark contrast with the on-going lackluster starts data in the region. The West came in second with a 21.9% year-over-year gain. The South was exactly flat, and the Northeast fell by 6.5%. Texas is a large part of the story of the South, so it is very possible the flat performance is indicative of a Texas housing market that is finally slowing down. I will be watching this as closely as ever.

The solid end to 2015 put annual sales at 501,000. This 14.5% year-over-year gain set a new post-recession record for annual sales. The recovery picked up pace again as sales finally went over levels last seen in 2008.


Annual new home sales reached a post recession record and finally hurtled over levels last seen in 2008.

Annual new home sales reached a post recession record and finally hurtled over levels last seen in 2008.


Source: US. Bureau of the Census, New One Family Houses Sold: United States [HSN1F], retrieved from FRED, Federal Reserve Bank of St. Louis, February 9, 2016.

Existing Home Sales – December, 2015

The National Association of Realtors (NAR) apparently correctly blamed November’s plunge in existing sales on a regulatory air pocket (“Know Before You Owe”). Sales came roaring back in December with a 7.7% year-over-year gain. The NAR described the 14.7% month-over-month increase as the largest on record, but this was of course a result of the extraordinary drop that occurred in November. Like starts and new home sales, existing home sales ended 2015 on a strong note. Annual sales have not been this high since 2006.


Sales of existing single-family homes stage a sharp recovery from November's plunge.

Sales of existing single-family homes stage a sharp recovery from November’s plunge.

Existing sales hit a new post-recession record and finally hurtled over 2007 levels.

Existing sales hit a new post-recession record and finally hurtled over 2007 levels.


Source: National Association of Realtors, Existing Home Sales© [EXHOSLUSM495S], retrieved from FRED, Federal Reserve Bank of St. Louis, February 9, 2016.

The surge in sales came at a cost. The inventory of existing homes for sale dropped sharply to a 3.9-month supply. This is the lowest rate since January, 2005 when it stood at 3.6%! Hopefully the market will soon come into better balance as the residual impact of the regulatory hiccup works its way through the system. Inventory was 5.1 months of sales in November. The drop in supply is one factor that has moderated the expectations for 2016 of NAR’s chief economist Lawrence Yun:

“Although some growth is expected, the housing market will struggle in 2016 to replicate last year’s 7 percent increase in sales…In addition to insufficient supply levels, the overall pace of sales this year will be constricted by tepid economic expansion, rising mortgage rates and decreasing demand for buying in oil-producing metro areas.”

The story for first-time home buyers is also very lukewarm. The annual share of 30% for first-timers is only up one percentage point from 2013 and 2014. This is the final confirmation of my expectations that new home buyers would make no progress in 2015.




Home Builder Confidence: The Housing Market Index– January, 2016

The Housing Market Index (HMI) stayed flat with a downwardly revised December index at 60. This flat performance of the overall index hides a stark divergence between current and future sales conditions. Current sales conditions rose 2 points to 67 while sales expectations 6 months out dropped a surprising 3 points to 63. The component for buyer traffic also fell. The chart below shows the rarity of this kind of divergence. I will be watching carefully to see whether the drops continue. They could provide a leading indicator even as current conditions look good.


The Housing Market Index continues its divergence from consumer confidence with the component for sales six months out showing a particularly bad drop.

The Housing Market Index continues its divergence from consumer confidence with the component for sales six months out showing a particularly bad drop.


Source: The National Association of Home Builders (NAHB)

The three-month moving averages for regional HMI scores declined in all four regions of the country. There must be some rounding error given the overall index was flat with the previous month. Regardless, the broad decline has my attention as well as the breakdown of the individual components.

Parting thoughts
The strong housing numbers of 2015 augur well for the Spring selling season. The extremely weak performance of ITB this year contrasts greatly with the strong 2015 performance. Unfortunately, the earnings of home builders have not boosted confidence in the market. For example, KB Home (KBH) disappointed big-time. Meritage Homes (MTH) delivered earnings on January 28, 2016 that sent the stock soaring 14% off prices last seen in mid-2012. However, those gains have almost all reversed as the stock failed to gain any follow-through momentum. The home builder confidence for January also presents cause for pause given the drop in expectations for future sales. Finally, the NAR’s chief economist clearly has put a lid on expectations for 2016’s housing market.

So I think of the housing market at an important crossroads with strong results from the rear but an ever more shadowy outlook ahead. The market is racing to try to price in some kind of economic slowdown or even recession and generating some extremely cheap home builder stocks. I am treating this as a buying opportunity even as I remain wary about the overall stock market. Assuming no recession is forthcoming, the stocks of home builders should deliver tremendous upside over the balance of this year. The upside may push out into early 2017 given the seasonal strength in home builder stocks typically ends with the Spring selling season.

Be careful out there!

Full disclosure: long ITB call options, long KBH call options

Feb
9

T2108 Update (February 9, 2016) – Hanging On For Yellen

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 20.8% (2nd day in a row T2108 dipped into oversold territory intraday)
T2107 Status: 14.0%
VIX Status: 26.5
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #8 over 20% (overperiod), Day #26 under 30% (underperiod), Day #42 under 40%, Day #46 below 50%, Day #61 under 60%, Day #402 under 70%

Commentary
For the second day in a row, the S&P 500 (SPY) experienced wide-ranging trading action often seen during bear markets. Sellers and buyers took the index on a wild ride of despair and hope. Both the S&P 500 and the NASDAQ (QQQ) are sitting at 15-month closing lows.


The S&P 500 is struggling to hold the intraday low of the last oversold period as support.

The S&P 500 is struggling to hold the intraday low of the last oversold period as support.

The NASDAQ is already below the intraday low of the last oversold period.

The NASDAQ is already below the intraday low of the last oversold period.


With both major indices limping so notably, I am surprised T2108, the percentage of stocks trading above their 40-day moving averages (DMAs), is not already in oversold territory. Instead, my favorite technical indicator has managed to close just above the 20% threshold two days in a row. Both days, T2108 managed to drop into oversold territory for a brief spell. T2108 is barely hanging on, floating above oversold territory.


T2108 is barely staying out of oversold territory.

T2108 is barely staying out of oversold territory.

T2107, the percentage of stocks trading above their respective 200DMAs, is struggling to stay off major multi-year lows.

T2107, the percentage of stocks trading above their respective 200DMAs, is struggling to stay off major multi-year lows.


The currency markets are reflecting the tension in the market. The Japanese yen (FXY) has sprung back to life and put us back on notice with negative market sentiment. In particular, the Australian dollar versus the yen, AUD/JPY, has plunged back to 3+ year lows. Resistance at the 50DMA held again.


AUD/JPY is flashing red all over again

AUD/JPY is flashing red all over again


The collective tension is thick – just in time for Janet Yellen, the chair of the U.S. Federal Reserve, to attempt a rescue plan. Her testimony in front of Congress for the next two days has the potential to turn around negative market sentiment. If the Fed’s typical anti-volatility efforts turn sour, sellers could punish the market into a brand new phase of selling. I have chosen to make my typical pre-Fed, anti-volatility bet. I covered my short put on ProShares Ultra VIX Short-Term Futures (UVXY) on Monday. Today, I loaded up long UVXY puts. Volatility cooperated going into the close as it seems other traders also want to position to avoid fighting the Fed.


The volatility index, the VIX, is on the rise again. Can the 2012 intraday high hold as resistance yet again?

The volatility index, the VIX, is on the rise again. Can the 2012 intraday high hold as resistance yet again?

ProShares Ultra VIX Short-Term Futures (UVXY) failed to hold above its upper-Bollinger Band for the second day in a row.

ProShares Ultra VIX Short-Term Futures (UVXY) failed to hold above its upper-Bollinger Band for the second day in a row.


While my trading call remains bullish and T2108 sits on top of oversold conditions, I have ADDED new bearish positions as hedges. I am VERY wary of the trading action. Sellers have simply had their way with little fight from buyers. Financials in particular are looking increasingly vulnerable, and I finally made a big move in this sector. I bought put options against Financial Select Sector SPDR ETF (XLF) and Deutsche Bank AG (DB). DB has been cratering for quite some time and now sits at a fresh all-time low.

A lot is sitting on Yellen’s shoulders now. Even the U.S. Dollar index (DXY0) is barely holding on!


So much for that conventional thinking that wanted a weaker U.S. dollar to support the stock market! The U.S. dollar index has broken down below 200DMA support.

So much for that conventional thinking that wanted a weaker U.S. dollar to support the stock market! The U.S. dollar index has broken down below 200DMA support.


If Yellen calms the market, the dollar index is likely to fall further. If she sticks to the script of “rate normalization” that has put the Fed on an island of monetary policy, the stock market is likely to fall further. Either way, I expect more wide-ranging trading action and will be even more keen to look for intraday trading opportunities.

— – —

For readers interested in reviewing my trading rules for T2108, please see my post in the wake of the August Angst, “How To Profit From An EPIC Oversold Period“, and/or review my T2108 Resource Page.

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
U.S. Dollar Index (U.S. dollar)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).
IBB (iShares Nasdaq Biotechnology).


Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO call options, long SSO shares, long SVXY shares, long UVXY puts, net long the U.S. dollar, short AUD/JPY

Feb
8

The Bank of England’s Recent Retreat On Rate Hikes (A Blueprint for the Fed?)

written by Dr. Duru
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What a difference 19 months make.

It was June, 2014 when Bank of England (BoE) Governor Mark Carney confidently warned financial markets that rate hikes could come earlier than implied at that time by the market. Less than a month later, the British pound (FXB) (or sterling) peaked against the U.S. dollar (DXY0). Peaks against the euro (FXE) and the Japanese yen (FXY) did not come until 2015. However, reality was soon clear: the Bank of England was in full retreat from its threats of rate hikes. This realization crystallized and received confirmation when a steep slide against all major currencies began in early December, 2015. The pound’s slide against the euro was particularly notable and has no doubt given the European Central Union (ECB) cause for pause.

One of the confirmations of the Bank of England’s intention to retreat from rate hikes came from Minouche Shafik, Deputy Governor, Markets & Banking. In a speech tellingly titled “Treading carefully,” Shafik explained why she hesitates to raise rates anytime soon (emphasis mine):

“…there is residual uncertainty about the relationship between the real economy and inflation – something economists refer to as ‘model uncertainty’ – which in this instance augurs for caution in setting monetary policy.4 The most likely outcome is that wage growth will soon resume its recovery, but there are alternative states of the world in which it takes longer for that to happen. So I judge it prudent to tread carefully, and refrain from voting for an increase in Bank Rate until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target.

Shafik noted that wage growth had recently plateaued, but acknowledged that the UK economy is generally well past the point where in previous cycles tightening would have begun:


Despite various economic strengths in the UK, wage growth and inflation remain lower than previous tightening cycles.

Despite various economic strengths in the UK, wage growth and inflation remain lower than previous tightening cycles.


Source: “Treading Carefully”, Bank of England.

On top of emphasizing a reluctance to raise rates, Shafik provided some revealing theory on the impact of the exchange rate on inflation. Given that the previous strength of the British pound will apparently suppress inflation in the United Kingdom for “several years to come,” I am assuming the BoE has an ingrained bias to avoid making moves to rekindle strength in the currency. All else being equal, the British pound could stay biased for weakness for much of the time it takes to wear off the disinflationary pressure from previous strength. From Shafik:

“Since 2008 we have learned more about how movements in the exchange rate, in particular, affect inflation. Contrary to the body of literature developed during the period of Great Stability, changes in the exchange rate do have a large and persistent effect on inflation through their effect on import prices. That means that the 18% appreciation of sterling which began in early 2013 (as the prospects for the UK economy improved relative to those of our trading partners) is currently exerting significant downward pressure on inflation and is likely to continue to exert some downward pressure for several years to come as lower import costs pass through the supply chain.”

Interestingly, Shafik still felt the need to remind the audience that rate hikes could come relatively quickly once the Bank of England finally got started. The quote contained echoes of Carney’s 2014 declaration (emphasis mine)…

“But once I am convinced, absent further shocks, I can see Bank Rate rising more quickly than the path implied by the market curve at the time of the last Inflation Report…

Personally speaking, should the downside risks from the world economy fail to materialise, and absent further shocks, once wage growth has returned to a level consistent with inflation returning to target I would expect the economy to warrant a path for Bank Rate that increases more quickly than implied by the market yield curve used to condition the November Inflation Report.”

Overall, Shafik clearly communicated a bias to avoid rate hikes in the short-term while attempting to maintain inflation-fighting credentials for the long-term. I am unclear on how to untangle the expectations of disinflationary pressures from the previously strong currency that will linger along with expected inflationary pressures from future economic performance.

A subsequent hint of a no-hike bias from the Bank of England came from a January 18,2016 speech at the London School of Economics by Gertjan Vlieghe, External MPC member. Vlieghe created the title “Debt, Demographics and the Distribution of Income: New challenges for monetary policy.” This speech was fascinating from beginning to end and for much more than just the interest rate implications. Vlieghe observed that today’s monetary policy goes beyond cyclical adjustments and now has been compelled to address structural issues and the fallout from global, macroeconomic pressures.

For addressing structural issues, Vlieghe wants central bankers to pay more attention to the “3 Ds”: debt, demographics, and distribution of income. Vlieghe points out that economists struggle to understand the persistence of low rates specifically because they are still using models that assume “…debt does not matter, there are no demographics and there is no distribution of income.” An examination of these 3 Ds suggests that the UK economy (and likely all other developed economies) will not revert to pre-crisis levels. This assumption rides within existing monetary models. Mean reversion is NOT in our future anytime soon.

Vlieghe uses this sober assessment of future economic performance to recommend caution and patience before proceeding with rate hikes:

“…for a given level of growth, real interest rates may remain significantly lower than in the past. The possibility of this scenario makes me more patient, other things equal, before raising rates, because we may not have to raise rates very much once we start. Moreover, the fact that, at very low interest rates, policy cannot respond as effectively to bad news as it can to good news also makes me more patient before raising rates…”

Vlieghe’s condition for hiking rates rests on a return of stable economic performance and upward trending inflation…

“…in order to be confident enough of the medium-term inflation outlook to justify raising Bank Rate, I would like to see more evidence that growth is stabilising after its recent slowdown, and that a broad range of indicators related to inflation are generally on an upward trajectory from their current low levels.”

With these conditions established, Vlieghe moves on to describe how the structural forces from the 3 Ds impact monetary policy.

Debt matters because the deleveraging process can limit the ability of the central bank to encourage more spending in the economy. Less spending in turn tends to depress inflationary pressures. A debt overhang thus generates “persistently weak recoveries” as consumers focus on bringing debt levels down instead of fueling economic activity through spending. With a lower bound on rates, the central bank can do little but wait out the deleveraging and avoid extending the process by hiking rates too early.

Demographics matter because longevity motivates more saving to the extent that retirement ages remain the same and declining fertility produces fewer workers who then require less investment. Higher savings and lower investment reinforce lower interest rates. However, since retired consumers save less and spend more, relatively speaking, they act against lower interest rates. The net balance of these forces is not formulaic, so it is a wildcard for the central bank to monitor over time. Demographics also evolve over long periods of time and could of course cross multiple business cycles.

Distribution of income matters because monetary policy can shift resources toward wealthier consumers who are more likely to save than spend. I believe Vlieghe is talking about the impact at the margins. More well-off consumers have fewer urgent spending needs than poorer households; this is especially true in the wake of a severe economic downturn. To the extent monetary policy does not help lower-income consumers, savings rates could increase further: these workers are forced to reduce spending in order to preserve future spending power. Vlieghe does not provide a novel prescription for dealing with an unbalanced income distribution. He merely suggests that rates must stay lower for longer to support lower income workers. The irony occurs when these same lower rates bolster the value of assets held by the wealthy which in turn can drive substantial income gains which finally further widen income distributions.

Vlieghe summarizes by integrating these forces in a way that points to slower economic growth:

“A high debt economy faces headwinds and needs lower interest rates. A high debt economy with adverse demographic trends needs even lower interest rates. And a high debt economy with adverse demographic trends and higher inequality … well, you get the picture.”

These reinforcing dynamics demonstrate why mean reversion is not likely coming out of the last financial crisis. Moreover, real interest rates “…will remain well below their historical average for a very long time, even with economic growth that is close to or only somewhat below its historical average…I think it is plausible that the appropriate real interest rate for the economy might be very low for years to come.” These policy implications have convinced Vlieghe that the Bank of England can stay patient ahead of raising rates.

Vlieghe’s conditions for hiking rates are very consist with Shafik’s conditions:

“With growth still slowing, and inflation pressures either easing outright or disappointing relative to forecasts, I do not believe the conditions are in place to warrant a rise in Bank Rate. I need to see further evidence that growth is indeed stabilising, and that a broad range of indicators relating to inflation, inflation expectations and pay growth are generally on an upward trajectory from their current low levels before being confident enough in the outlook to justify a rise in Bank Rate. In order to be confident enough of the medium-term inflation outlook to raise Bank Rate, I would like to see evidence that growth is not slowing further, and that a broad range of indicators related to inflation are generally on an upward trajectory from their current low levels.”

With commentary from the Bank of England like that from Shafik and Vlieghe, Mark Carney’s speech to set the direction for the Bank of England for 2016 was practically anti-climactic. On January 19, 2016 Carney delivered a speech called “The turn of the year” given at Peston Lecture, Queen Mary University of London. In this speech, he gave the official acknowledgement that the Bank of England put rate hikes on the shelf for 2016:

“Last summer I said that the decision as to when to start raising Bank Rate would likely come into sharper relief around the turn of this year.

Well the year has turned, and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates. This wasn’t a surprise to market participants or the wider public. They observed the renewed collapse in oil prices, the volatility in China, and the moderation in growth and wages here at home since the summer and rightly concluded that not enough cumulative progress had been made to warrant tightening monetary policy.”



Note that Carney fully recognized that the market had already concluded that the Bank of England had to retreat from rate hikes. In classic form, the currency market also responded with a lack of surprise: the British pound finally stopped going down. For example, against the U.S. dollar, the pound (GBP/USD) began an upward climb. Essentially, for the short-term at least, everyone who wanted to play the rate hike news against the British pound was already in the trade. The official news is a time to close out positions, take profits, and relish being correct. This bottom is still holding against the U.S. dollar although its has given way to other major currencies like the euro and the Japanese yen (FXY).


The British pound (FXB) bottomed on Carney's speech. Yet, it remains in a definitive downtrend and has not yet broken out.

The British pound (FXB) bottomed on Carney’s speech. Yet, it remains in a definitive downtrend and has not yet broken out.


Source: FreeStockCharts.com

The Bank of England continues to fascinate me with all its talk about taking action to drive inflation in one direction or the other. In reality, the BoE has done little but talk (outside of macroprudential policies) about inflation moving one way or another. The Bank has been in the business of trying to verbally guide market and consumer expectations about an inflation process that unfolds based on present economic conditions. This speech was no different:

“At present, the MPC is seeking to return inflation to the target in around two years and to keep it there in the absence of further shocks. We don’t want an overshoot of inflation.”

Carney reiterated the considerations in play for future monetary policy that would drive rate hikes. The Monetary Policy Committee wants to see actual and prospective progress on all three points before “…the initiation of limited and gradual rate increases”:

  • The prospects for growth momentum in excess of trend consistent with eliminating spare capacity in the economy.
  • Evidence of and expectations for a sustainable firming in domestic cost pressures.
  • Developments in core inflation consistent with a reasonable expectation that total CPI inflation will return to the target in around two years’ time.


The Bank of England now worries about the sudden decline in wage growth despite the continued decline in the unemployment rate (shown inversely above)

The Bank of England now worries about the sudden decline in wage growth despite the continued decline in the unemployment rate (shown inversely above)


Source: Bank of England

Global disinflationary pressures are weighing on the UK. China is of course right in the center of this storm. Carney noted that UK exports to China have dropped by 1/3 year-over-year from November, 2014. Carney expects these pressures to continue and to weigh on domestic demand via the wealth effect and the financial tightening that comes from panicked markets. Like Shafik, Carney referenced past appreciation of the currency as a weight on inflation. Carney reminded the audience that “…around two-thirds of the effects of a currency move are estimated to appear in CPI inflation at horizons beyond one year.” According to the chart provided below, the trade-weighted British pound peaked just last November. Presumably then, currency-related disinflation will last at least through most of 2016.


The British pound has declined against the U.S. dollar for 18 months off the post-recession peak. However,  on a trade-weighted basis, the currency has only recently begun to cool off (mostly thanks to the euro).

The British pound has declined against the U.S. dollar for 18 months off the post-recession peak. However, on a trade-weighted basis, the currency has only recently begun to cool off (mostly thanks to the euro).


Source: Bank of England

The members of the Bank of England were so effective in talking down the prospects of rate hikes that the most interesting moment of the latest Inflation Report (February 4, 2016) came when Carney had to address market odds of 30% that the Bank’s next move would be a rate CUT. From Ed Conway of Sky News:

“Governor, the markets are now pricing in the possibility – about a 30% possibility – of there being a rate cut rather than a hike in the next year. You’ve said repeatedly that you feel that the next move is likely to be up rather than down. Do you still stand by that?”

Here is the most important snippet of Carney’s response (emphasis mine):

“Absolutely. The whole MPC stands by that. We’ve just released our forecast which, as I mentioned in my opening remarks, is conditioned on a market path of interest rates…that 15-day average of the path of rates is rates sustained at current levels for a little while longer, and then gradually increasing father out over the horizon…

And in using that market forecast, based on our central view of the economy, we actually don’t achieve our objective. Let me put it a different way. Inflation gets back to target, but then it rises above it. So there’s not quite enough tightening in that market path that we used in order to do what the MPC is very clear – has been very clear about – is its objective, which is to return inflation to target in around two years and to keep it there – not to have an overshoot…

So as I said, again, and we said in the Minutes and in the Monetary Policy Summary, and was clear in the letter to the Chancellor, the view is that more likely than not, the next move in rates is up, and that is consistent with the forecast, yes.

In other words, Carney is claiming that if rates stay at current levels for the next two years or so, inflation in the UK will get too high. So, at some point over this time period, the Bank of England needs to hike rates. This prospect is far enough into the future that the currency market is certainly not worrying about it. Instead, the more immediate concern for currency markets rests with the looming fear that the Bank of England could eventually join the growing number of its peers on retreat on rates.

Oh how far expectations have dropped in 19 months! I cannot help but wonder whether the Bank of England has developed a blueprint for the U.S. Federal Reserve. Financial markets have priced away any rate hikes in the U.S. for 2016


The U.S. dollar index has started to stumble as markets once again start to lose faith in Fed rate hikes.

The U.S. dollar index has started to stumble as markets once again start to lose faith in Fed rate hikes.


Source: FreeStockCharts.com



Be careful out there!

Full disclosure: long and short various currencies against the British pound

Feb
7

T2108 Update (February 5, 2016) – The Fallen Ones

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 26.8%
T2107 Status: 16.2%
VIX Status: 23.4
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #6 over 20% (overperiod), Day #24 under 30% (underperiod), Day #40 under 40%, Day #44 below 50%, Day #59 under 60%, Day #400 under 70%

Commentary
The bad news is that tech stocks and growth stocks in general got crushed on Friday, February 5, 2016. The good news is that T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), hung in there for the day and barely reflected the carnage in tech. In other words, the broader market has not yet broken down like tech stocks have in the past week. In between the good and the bad news hangs my prediction and expectation that the S&P 500 (SPY) will hit resistance at its overhead 50DMA before dropping into oversold conditions yet again. That prediction is looking a little more precarious.


Incredibly, the NASDAQ (QQQ) has made a new 16-month closing low even though T2108 did not tumble into oversold territory

Incredibly, the NASDAQ (QQQ) has made a new 16-month closing low even though T2108 did not tumble into oversold territory

T2108 fell but is still in a small uptrend from its recent historic lows.

T2108 fell but is still in a small uptrend from its recent historic lows.

The S&P 500 is marginally better off than the NASDAQ. The S&P 500 made its third lowest close since pulling out of the January bottom.

The S&P 500 is marginally better off than the NASDAQ. The S&P 500 made its third lowest close since pulling out of the January bottom.


The relative resilience of T2108 suggests that the broader market is still hanging in there even as the (former) leaders of the indices are stumbling. And my are they stumbling. They are becoming the new fallen ones. Facebook (FB) is doing its best to drop from “full bull” status with three days of high-volume selling that has reversed all its incremental post-earnings gains. FB now faces a critical retest of 50DMA support.


Is the full bull celebration coming to a rapid conclusion for Facebook?

Is the full bull celebration coming to a rapid conclusion for Facebook?


Google (GOOG)? Forget about it. Not only did GOOG quickly erase ALL its post-earnings gains that sent the stock to a fresh all-time high, but also it sliced through 50DMA support like butter. With a fresh closing low for 2016, GOOG is once again on the edge of filling the post-earnings gap up from October. Support at its 200DMA is also in play. I placed a limit order on Friday that got filled near the close….{gulp}.


The market has forgotten all about Google's (GOOG's) earnings in a flash.

The market has forgotten all about Google’s (GOOG’s) earnings in a flash.


I have not posted about Tesla (TSLA) since I pointed out the very bearish 50DMA breakdown early in January. I also dared not trade TSLA from the bearish side because I assumed it would be one of the first stocks to enjoy a sharp relief rally whenever the market popped out of its funk. Instead, TSLA has traded nearly straight down ever since and is now at a 2-year low. TSLA is no longer teflon and could even be losing its cult-like appeal. Earnings on February 10th after-market should provide a key tell for residual commitment to TSLA.


Tesla (TSLA) is clearly losing favor with speculators and momentum types.

Tesla (TSLA) is clearly losing favor with speculators and momentum types.


There were two significant earnings-related collapses that completely blew me away. These ring out like loud alarm bells for all growth and other (former) momentum-type stocks. LinkedIn (LNKD), a former trading favorite of mine, dropped a gut-wrenching 43%. Tableau (DATA), a stock I assumed would be on the mend after its next earnings report, collapsed a whopping 49%. These types of massive one-day drops of well-known names with good, solid businesses are extremely rare. So, they have my attention big-time.

As readers know, I like buying stocks which drpo well below lower-Bollinger Bands (BBs). THESE drops were no-brainers to try. I was able to flip LNKD call options for a day trade, and I still have the stock on my buy list for swing trades this week. I also want to believe that over the longer-haul LinkedIn is just fine.

I was not as fortunate with DATA. First of all, I had a pre-earnings call spread going that completely blew up on me. Ironically, I preferred to buy shares and put options as a hedge, but I thought the put options were too expensive. Silly me! My hedged bullish position would have turned into huge profits with this kind of decline. Post-earnings, I bought shares rather than call options, but DATA lost a little more going into the close.


LinkedIn (LNKD) collapses and sellers keep up the pressure almost all day. Trading volume was 29x the 3-month average!!!!

LinkedIn (LNKD) collapses and sellers keep up the pressure almost all day. Trading volume was 29x the 3-month average!!!!

The weekly chart for LinkedIn (LNKD) shows a 3-year low that could eventually turn into something much worse.

The weekly chart for LinkedIn (LNKD) shows a 3-year low that could eventually turn into something much worse.

@BullBear_DD @nitehawk @TraderMike – so I assume poor EPS guide and OK rev guide means slash (expensive) prices to push volume? $DATA

— Duru A (@DrDuru) Feb. 4 at 02:19 PM

The panic and stampede out of Tableau Software, Inc. (DATA) was as bad as LNKD. At least trading volume was "only" 14x the 3-month average.

The panic and stampede out of Tableau Software, Inc. (DATA) was as bad as LNKD. At least trading volume was “only” 14x the 3-month average.

The weekly for DATA shows a stock at an all-time low. It was at an all=time high just last summer. The IPO priced at $31.

The weekly for DATA shows a stock at an all-time low. It was at an all=time high just last summer. The IPO priced at $31.


Splunk (SPLK) dropped in sympathy with DATA. Again, I cannot even remember when I last saw a stock drop this much in sympathy with an industry peer’s bad news. While I have long been bearish on SPLK, I did not have a short position going at the time. This drop was deep enough to make me try to play a bounce from here. Nerves will certainly be running thin when the company reports on February 25th after-market. For now, I am assuming DATA suffered some company-specific issues that are likely competitive in nature. So, I am looking for excuses to finally get bullish on SPLK.


Splunk (SPLK) loses 23% and closes around a 3-year low... all thanks to DATA and what is clearly a mass exodus from these kinds of expensive (former) growth and momentum stocks.

Splunk (SPLK) loses 23% and closes around a 3-year low… all thanks to DATA and what is clearly a mass exodus from these kinds of expensive (former) growth and momentum stocks.


Like T2108, the volatility index, the VIX, did not move as much as I would have expected given the carnage in tech stocks. This kind of divergence is a slight positive, BUT the VIX seems to have confirmed 50DMA support and a growing uptrend from the last lows.


The volatility index does not tell the true tale of spreading panic and fear in growing pockets of the stock market.

The volatility index does not tell the true tale of spreading panic and fear in growing pockets of the stock market.


While growth and momentum stocks have received a pounding, money SEEMS to be rotating over to the truly beaten up stocks in cyclicals, especially commodity-related. I believe this rotation will be short-lived. I used this opportunity to double down on my favorite hedge against bullishness, Caterpillar (CAT), and to reload put options on BHP Billiton Limited (BHP). These stocks could have an additional tailwind or at least respite this week given the slowdown of economic activity and reporting for the Chinese New Year.


Caterpillar (CAT) is at a critical test of 50DMA resistance. This is a fight that has failed consistently since last summer.

Caterpillar (CAT) is at a critical test of 50DMA resistance. This is a fight that has failed consistently since last summer.

BHP Billiton Limited (BHP) has bounced sharply since a debt downgrade. 50DMA resistance loom directly overhead.

BHP Billiton Limited (BHP) has bounced sharply since a debt downgrade. 50DMA resistance loom directly overhead.


Amid all this doom and gloom, gold continues to sneak its way higher. Perhaps traders are running to gold for a “safe haven.” I think safe havens are just temporary refuges for false hopes. I can better accept GLD as a bet or hedge against the U.S. dollar. SPDR Gold Shares (GLD) experienced strong buying volume: 2.3x the 3-month average. The current 200DMA breakout is the strongest and most impressive since January, 2015 when the Swiss National Bank capitulated on its currency floor against the euro. GLD now needs to break above the last highs (set in October) to get a breakout from the current downtrend.


SPDR Gold Shares (GLD) is gathering steam again.

SPDR Gold Shares (GLD) is gathering steam again.


— – —

For readers interested in reviewing my trading rules for T2108, please see my post in the wake of the August Angst, “How To Profit From An EPIC Oversold Period“, and/or review my T2108 Resource Page.

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
U.S. Dollar Index (U.S. dollar)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).
IBB (iShares Nasdaq Biotechnology).


Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO call options, long SSO shares, long SVXY shares, short UVXY puts, long CAT puts, long FB calls and short shares, net long the U.S. dollar, long GLD, long DATA, long GOOG call options

Feb
7

January U.S. Jobs Numbers Do Not Boost Rate Hike Odds Enough for 2016 Action

written by Dr. Duru
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The U.S. jobs numbers for January, 2016 were good enough to send odds for the next rate hike from the U.S. Federal Reserve to jump across the scheduled meetings for 2016. Yet, the odds for December as the next month for a rate hike are still well under 50%.


The odds for another rate hike this year remain unlikely with December sitting at 44% as the odds for the next hike.

The odds for another rate hike this year remain unlikely with December sitting at 44% as the odds for the next hike.


Source: CME Group FedWatch

Although the odds still favor no rate hike for 2016, the rise across the remaining months was high enough to help the U.S. dollar index (DXY0) to maintain support at its 200-day moving average (DMA).


The U.S. dollar index had an awful week but ended on a slightly positive note with the January jobs data.

The U.S. dollar index had an awful week but ended on a slightly positive note with the January jobs data.


Still, the trend for the iShares 20+ Year Treasury Bond (TLT) remains definitely pointed upward (meaning long-term yields are going down).


The iShares 20+ Year Treasury Bond (TLT) has trended upward for all of 2016 and was barely dented by the Fed's rate hike in December.

The iShares 20+ Year Treasury Bond (TLT) has trended upward for all of 2016 and was barely dented by the Fed’s rate hike in December.


The message from the markets is VERY clear. Yet, I still hear and read some pundits continue to parrot the Fed’s claim from December that we should expect four rate hikes in 2016. These claims help create lingering uncertainty about the Fed’s plans. Chair Janet Yellen gets an opportunity this week to provide some clarity.

Yellen speaks to Congress this week as part of the Fed’s Semiannual Monetary Policy Report to the Congress. Yellen appears before the House on February 10th and the Senate on the 11th. These appearances will indicate whether the Fed is going to concede to the market’s expectations as it prefers to do, or whether the Fed wants to try to guide markets back to a 2016 rate hike. Given the current odds, Yellen’s speech is not likely to weaken the dollar much further but she could strengthen it a lot.

Despite the apparent asymmetric odds favoring a dollar rally, I reduced my net long U.S. dollar position. This change includes taking AUD/USD off my list of aggressive trades (going short in this case). Note I am still very much bearish the Australian dollar, but against the U.S. dollar I am suspecting an extended trading range is developing. AUD/USD is trending up from the most recent low but it definitely failed 200DMA resistance and broke through 50DMA support all in one day.


The Australian dollar is still in the middle of a bounce off the most recent lows.

The Australian dollar is still in the middle of a bounce off the most recent lows.


Source for charts: FreeStockCharts.com

Stay tuned and be careful out there!

Full disclosure: net long the U.S. dollar, net short the Australian dollar

Feb
6

The Weak Relationship Between Bear Markets and Recessions

written by Dr. Duru
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The February 4, 2016 edition of Nightly Business Report included a segment assessing the ability of the stock market to predict recessions. This is of course a timely piece given the stock market’s current plunge and growing recession fears arising from analyst commentary and softening economic data.

Steve Liesman, chief economist for CNBC, took a crack at this age-old question. He used S&P 500 (SPY) price data going back to 1945, the post-war era. He overlayed these data with the timing of bear markets. This periods covers 13 bear markets and 11 recessions. A bear market occurs after the S&P 500 loses 20% from its last all-time high.


A timeline of bear markets juxtaposed with the timing of recessions.

A timeline of bear markets juxtaposed with the timing of recessions.


Source: NBR

Liesman counted a successful prediction if the bear market occurred within one year ahead of the recession, with some wiggle room for a few days. This definition created a 53% historical fraction of bear markets preceding a recession (7 out of 13 bear markets were followed by a recession). I am purposely not using the term “predict” as Liesman does because the sample is so small. Moreover, Liesman does not consider the false negative: 4 of the 13 recessions were not preceded by bear markets. Regardless, 53% is nothing to write home about; it is not an actionable likelihood.

The link between bear markets and recessions interests traders and investors differently than economists. In so many cases, a bear market is well underway or even almost over by the time an official recession occurs. Moreover, we do not know a recession has officially occurred until at least two quarters after the start. This makes a recession a time for traders to consider closing out shorts and a time for long-term investors to count their pennies and load up on cheap stocks. Traders and investors are much more interested in the precursors of bear markets than recessions.

The S&P 500 is currently down 12% from its last all-time high set on May 21, 2015. A bear market would take the index back to around 1704, a level last seen October, 2013. Given the on-going destruction in commodity-related stocks and now a swath of growth stocks, such an extended sell-off should create a whole host of stocks too cheap to ignore. The all-time high set in the last bull market was around 1575. A retest of that support would mark a 26% decline from this bull market’s all-time high. I consider both 1704 and 1575 in play if the S&P 500 fails to hold its intraday low from the last oversold period.


The edge of danger: The S&P 500 (SPY) prints its second lowest close since the most recent bottom.

The edge of danger: The S&P 500 (SPY) prints its second lowest close since the most recent bottom.


Source: FreeStockCharts.com



Be careful out there!

Full disclosure: long SSO call options and shares

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