ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Jan
23

Array BioPharma and Pandora Deliver Big for Options Buyers

written by Dr. Duru
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I wish I could find a report that looks back on big stock moves and looks for any tell-tale options activity. It is always difficult to translate options action into predictions on stocks, but having a “hindsight” report could prove educational. In the meantime, we will have to settle for sporadic reports like this piece (or let me know where I should look).

On Friday, January 23, Array BioPharma, Inc. (ARRY) soared 41% on 36M shares traded (about 18x the average rolling 3-month volume).


Array Biopharma soars on Novartis deal

Array Biopharma soars on Novartis deal


The chart shows a very nice technical setup that could have been bought without knowing anything about ARRY’s fundamental story. The gap up on December 4, 2014 sent the stock soaring above its 200DMA and the subsequent dribble downward finally ended with a brief breakdown below 50DMA support. A buy on the 50DMA recovery would have made a lot of sense from a technical standpoint, especially given the earlier 200DMA breakout.

Here is a snippet of the news that caused all the excitement:

“Array BioPharma Inc. (NASDAQ: ARRY) today announced that it has reached a definitive agreement with Novartis Pharma AG to acquire worldwide rights to encorafenib (LGX818), a BRAF inhibitor currently in Phase 3 development. This agreement is conditional on the closing of transactions announced by Novartis and GlaxoSmithKline PLC (GSK) on April 22, 2014, which are expected to close in the first half of 2015, and the agreement remains subject to the receipt of regulatory approvals.”

Here is a snapshot of at least one trader who made a LOT of money off today’s action: according to briefing.com, on January 20, 2015 ARRY Jun $5 calls traded 1,570 contracts versus open interest of 4,890 with almost all the volume attributable to one trade near the ask. The trades drove implied volatility from 83% to 94%. According to data from Etrade.com, those calls sold for around $0.95 each and are now worth about $2.70, a nifty 184% gain. Given volume of 2,093 contracts today, I can imagine this lucky trader cashed out.

In other options news, Pandora (P) soared 10% apparently in response to the results of a survey from OTR Global. According to TheStreet.com:

“The 17 ad agencies included in the OTR Global survey said they are generally pleased with the performance of ads on Pandora, and plan on “significantly” boosting their ad spend on the streaming music service this year.

The OTR Global survey also said that Pandora local ad spend increased 90% year over year in the fourth quarter.”


Pandora pops on favorable OTR Global survey results

Pandora pops on favorable OTR Global survey results


Source: FreeStockCharts.com

The options trade that made big money on Pandora was VERY fortuitous. According to briefing.com, M&A rumors drove the purchase of about 10,000 call options versus under 1,000 put options. Briefing.com specifically called out the Jan $16 weekly calls expiring TODAY given volume of 4,440 options versus an open interest of 1,100. This action helped drive implied volatility from a mere 3% to 58%. As the chart above shows, the low implied volatility made sense given Pandora came into the week trading around lows (levels last seen in mid-2013).

The VERY interesting trade here is a potential fade of Pandora ahead of earnings. It seems the trade was all about anticipating good results from the OTR Global survey and NOT earnings or M&A action. The on-going downtrend from the all-time peak in March, 2014 seems to support a negative bias toward earnings. I would of course NEVER short a stock like this, only options (for example, short interest is a relatively large 14.6% of the float). I will write more if I decide to make a trade ahead of earnings.

Be careful out there!

Full disclosure: no positions unfortunately

Jan
22

T2108 Update (January 22, 2015) – Return of the Stock Market’s Soothing Salve

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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 51.2%
T2107 Status: 47.1%
VIX Status: 16.4 (down 13%)
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #65 over 20%, Day #24 above 30%, Day #4 over 40%, day #1 over 50% (overperiod), Day #34 under 60% (underperiod), Day #135 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
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).

Commentary
When I last wrote a T2108 Update a week ago, the market felt heavy enough to switch my trading bias to bearish. I stuck by the anti-volatility bets but was on the hunt for set-ups to go short on individual stocks. I chose not to chase the S&P 500 (SPY) lower because I tend only to short the index when it is overbought or it experiences a major technical breakdown (well above oversold conditions). As it turned out, the S&P 500 never even retested 200DMA support as sellers completely lacked follow-through. It left me over the last week with very few bearish trades to even try.


The S&P 500 surges above its 50DMA....again

The S&P 500 surges above its 50DMA….again


So, the market continues to chop with every move higher and then lower and higher again causing a whoosh of excitement. This time around the excitement came from the soothing salve of the European Central Bank (ECB). Its announcement of a quantitative easing (QE) program was apparently met with great market approval. The apparent impact on volatility was most dramatic and allowed me to close out all my anti-volatility positions with respectable gains: shares in ProShares Short VIX Short-Term Futures (SVXY) and put options on ProShares Ultra VIX Short-Term Futures (UVXY).


The market's salve comes in the form of a central bank just one week after a different central bank helped send volatility to its closing peak for the cycle

The market’s salve comes in the form of a central bank just one week after a different central bank helped send volatility to its closing peak for the cycle

The strong surge for ProShares Short VIX Short-Term Futures (SVXY) still leaves it stuck in a downtrend so far marked well by a declining 20DMA

The strong surge for ProShares Short VIX Short-Term Futures (SVXY) still leaves it stuck in a downtrend so far marked well by a declining 20DMA


Note how volatility reached a closing cyclical peak after the Swiss National Bank (SNB) threw markets for a loop by dropping its currency cap on the Swiss franc (FXF) against the euro (FXE). A week later, the ECB helped plunge the VIX by 13% in a day, 27% off the last cyclical peak. This latest volatility cycle covered a nice range, but notice how SVXY still appears locked in a downtrend. I am a little more wary of the fade volatility trade and will look for a greater extreme next time I try it.

T2108 closed at 51.2% after an impressive surge of 9 percentage points. T2108 has not managed to move much higher than these levels since the bounce from the December lows. I have no reason to drop my long-standing assumption that the stock market is caught in a choppy range. I have changed the trading bias to bullish only because the S&P 500 broke above its 50DMA. I can only assume that all-time highs will represent a cap. A break to new all-time highs will be bullish with special caveats in place if T2108 tests overbought conditions around the same time.

Google (GOOG) is one stock I thought I could fade when the trading bias was bearish. Today, it blew right through 50DMA resistance AND the high from the previous bounce. I set up a trade on put options to trigger only if the stock broke through its low of the day after today’s open; unfortunately the condition triggered and within minutes GOOG was off and running. The stock now looks quite manic. However, since the last low now looks like a hammer bottoming pattern, I must change my trading bias on GOOG to bullish. If I had been prepared to change bias earlier, today’s incredible surge would have made a very profitable trade on call options! Resistance looms overhead from the declining 200DMA.


Google turns manic and confirms a double bottom

Google turns manic and confirms a double bottom


The trade on Conn’s Inc. (CONN) came to an abrupt end as the stock declined 11% to start the week. I was hoping the stock would rebound after January options expiration. The stock position was even at that time and the call option I sold against the stock expired worthless (paying for half of the higher strike call options I purchased). So, I cut the stock loose and bought a few call options just in case the stock revives again.


With the supportive options action expired and behind it, Conn's resumes its sickly ways

With the supportive options action expired and behind it, Conn’s resumes its sickly ways


In some good news, I closed out all my gold-related short-term trades with nice profits yesterday. I sold a bit early as gold took a brief dip. I had a sensitive sell trigger in effect because SPDR Gold Shares (GLD) has been ripping higher well above its upper-Bollinger Band – such moves are rarely sustainable and usually lead to substantial pullbacks at some point. I am looking to buy aggressively into that next dip.


The ever stronger US dollar is not preventing gold from continuing to soar year-to-date

The ever stronger US dollar is not preventing gold from continuing to soar year-to-date


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
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 GLD, long GOOG put options, long CONN call options, net LONG the euro (short term!), short the Swiss franc

Jan
15

T2108 Update (January 15, 2015) – Like So Much Paper Flailing in the Ill Winds

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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 36.5%
T2107 Status: 41.9%
VIX Status: 22.4 (up 4.2% but failed to close above previous day’s high)
General (Short-term) Trading Call: Bearish
Active T2108 periods: Day #61 over 20%, Day #20 above 30%, Day #2 under 40% (underperiod), Day #11 under 50%, Day #29 under 60%, Day #131 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
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).

Commentary
I was just about to write a quick T2108 Update for January 14, 2015 when a bomb dropped in currency markets. The Swiss National Bank capitulated on its 1.20 floor against the euro, sending EUR/CHF quick-fast and in a hurry toward parity. Just like that my assessment of the market’s health took a dramatic southward turn. Needless to say, I failed to write that T2108 Update.


A rapid plunge back to parity for the Swiss franc against the euro

A rapid plunge back to parity for the Swiss franc against the euro

Even the mighty U.S. dollar gave up 2 1/2 years of gains against the franc in one fell swoop

Even the mighty U.S. dollar gave up 2 1/2 years of gains against the franc in one fell swoop


This abrupt change in the forex landscape wreaked havoc for quite some time as traders scrambled to adjust. The Japanese yen (FXY) looked to gain for a while as a new safety currency. The Australian dollar (FXA) fared a LOT better than I would have expected given the sudden expression of risk aversion: the surge in strength in the Swiss franc is a massive display of pent-up demand and market angst. In the end, AUD/JPY completed an ominous fade and failure from what now looks like 200DMA resistance.


The Australian dollar versus the Japanese yen  continues to flash a warning sign

The Australian dollar versus the Japanese yen continues to flash a warning sign


The currency action in total tells me to bias my interpretation of trading on the S&P 500 (SPY) with a bearish tint. Indeed, the index violated a potential hammer from the previous day, broke below 2000, and to add insult to injury, it finally closed below the starting point for December’s Santa Claus rally. A retest of 200DMA support is a mere one or two days of losses away.


The S&P 500 continues to wobble

The S&P 500 continues to wobble


T2108 closed at 36.5%. If the S&P 500 makes a 200DMA retest soon, T2108 will be under 30%. Such a break and retest will be “close enough” to consider aggressive buys on the index. However, under these bearish conditions, I will greatly prefer to make a move only when/if T2108 hits oversold conditions (below 20%). Note that December’s low came up short relative to oversold AND the S&P 500’s 200DMA. I was MUCH more bullish then given my expectations for the Santa Claus rally. Note well that the S&P 500 can break 200DMA support and still stay well within the range of chop that I continue to expect for the time being. It iwll take a break of the October lows to significantly change my trading perspective.

The one small bullish hint came from the behavior of the volatility index, the VIX. Even though the S&P 500 made a convincing breakdown AND currency markets were going crazy, the VIX “only” managed a 4.2% gain. The VIX could not even close above the previous day’s high when the markets made a spirited comeback into the close. The highs from December and October are still “miles” away.


The volatility index has yet to surge, making only reluctant progress toward previous highs

The volatility index has yet to surge, making only reluctant progress toward previous highs


I interpret this reluctant move by the VIX as a sign that the market just needs one positive catalyst (QE for the eurozone anyone?) for volatility to get smashed once again. Accordingly, I nibbled again on shares of ProShares Short VIX Short-Term Futures (SVXY). I am still ready to load up on put options on ProShares Ultra VIX Short-Term Futures (UVXY) if volatility finally does surge well above its upper-Bollinger Band. I will not buy call options on ProShares Ultra S&P500 (SSO) until T2108 hits oversold. In the meantime, most of my trades on individual stocks are focused on shorting opportunities (home builders are a HUGE exception).

Gold has increasingly caught my attention here. Seeing currencies act like the paper-thin playthings of powerful central banks has made me appreciate all over the relatively “realness” of gold (GLD). I think I have good company here. I pointed out in an earlier T2108 Update how gold had remained remarkably resilient in the past few months even as the U.S. dollar continued to power higher. No surprise given the machinations in the currency market that SPDR Gold Shares (GLD) gapped higher today. Even though GLD slammed right into 200DMA resistance, I went ahead and added to my long-term holdings with short-term trades in VelocityShares 3x Long Gold ETN (UGLD) and Direxion Daily Jr Gld Mnrs Bull 3X ETF (JNUG). I am ready to add to my short-term holdings on dips going into the next monetary policy announcement from the European Central Bank.


SPDR Gold Shares (GLD) is likely heading for a major breakout

SPDR Gold Shares (GLD) is likely heading for a major breakout


I think the prospects of so much euro paper flailing in the (ill) winds should make gold look better than ever.

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
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: net short Australian dollar and the Swiss franc, net long U.S. dollar, long SVXY, long UVXY put options

Jan
15

The Swiss National Bank Capitulates On the Swiss Franc

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on January 15, 2015. Click here to read the entire piece.)

The Swiss national Bank (SNB) curtly reminded me that paper currencies are just the playthings of central banks.

Just over a week after I had start enjoying more actively shorting the Swiss franc (FXF), the Swiss National Bank dropped a bomb on financial markets by announcing it will pull the rug from under the EUR/CHF by removing the 1.20 artificial floor. The impact was immediate and dramatic.


The euro plunges back toward parity with the Swiss franc as the SNB capitulates on its floor

The euro plunges back toward parity with the Swiss franc as the SNB capitulates on its floor

There goes the entire length of the U.S. dollar's rally since the breakout from the summer of 2014

There goes the entire length of the U.S. dollar’s rally since the breakout from the summer of 2014


Source for charts: FreeStockCharts.com

The SNB’s capitulation comes with a few vain attempts to smooth over this dramatic change in monetary policy. First, the SNB moved its range on three-month Libor further to –1.25% to −0.25% from −0.75% to 0.25%. {snip}

{snip}

Next up, the SNB suggested that it is really its exchange rate against the U.S. dollar that provided the final trigger on this decision:

{snip}

This is a euphemistic way to refer to capitulation. {snip}

Finally, the SNB makes a hopeful stab at guessing that more deeply negative rates will prevent an over-tightening of monetary conditions. {snip}

This surprise move exposed a severe weakness in my trading strategy. {snip}

As it stands, my exposure was thankfully relatively small as I was just in the beginning process of rebuilding positions short the franc. {snip}

This whole episode reminds me of my own warning about the potential for more wild currency moves when I wrote “Parabolic Moves In The Ruble And Turkish Lira May Foreshadow The Same For The Australian Dollar.” Anyone got gold…?

Be careful out there!

Full disclosure: short franc

(This is an excerpt from an article I originally published on Seeking Alpha on January 15, 2015. Click here to read the entire piece.)

Jan
15

Short the Franc Even As Negative Rates Are Proving Insufficient to End Strength Versus the Euro

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on January 5, 2015. Click here to read the entire piece.)

Don’t look now, but the Swiss franc (FXF) is seemingly back for another test of the 1.20 currency floor against the euro (FXE).


The Swiss franc has almost reversed all its losses against the euro from the announcement of negative rates

The Swiss franc has almost reversed all its losses against the euro from the announcement of negative rates


When the market forced the hand of the Swiss National Bank (SNB) to take additional measures to weaken the franc, the SNB rolled out negative interest rates. As the chart above shows, the impact was immediate, yet the market’s preference to fade the weakness was also immediate. {snip}

In the meantime, the Swiss franc IS continuing to weaken against the U.S. dollar (UUP) – so much so that the USD/CHF currency pair returned to parity to start off 2015.


The U.S. dollar re-achives parity against the Swiss franc

The U.S. dollar re-achives parity against the Swiss franc


This weekly chart suggests that the U.S. dollar is breaking out against the Swiss franc and can very easily rally to highs last seen in 2010. {snip}

These dynamics now make me prefer shorting the Swiss franc over shorting the euro. For example, it is very possible that the next monetary policies out of the ECB instill enough confidence in the market that traders start bidding the euro UP in anticipation of better days ahead. In such a case, EUR/USD becomes an amazing, contrarian play. But this will still leave the SNB unsatisfied if EUR/CHF stays just as low as ever with the franc bid up in sympathy. In other words, the onus of weakness seems to lie now much more heavily on the franc than the euro. Time should soon tell.


Oh the ironies! When the euro was last THIS week, the running fear was a collapse of the entire monetary union.

Oh the ironies! When the euro was last THIS week, the running fear was a collapse of the entire monetary union.


Source for charts: FreeStockCharts.com

Be careful out there!

Short the euro, franc; long the U.S. dollar

(This is an excerpt from an article I originally published on Seeking Alpha on January 5, 2015. Click here to read the entire piece.)

Jan
15

Currency Markets Once Again Force the Hand of the Swiss National Bank

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on December 18, 2014. Click here to read the entire piece.)

The Swiss National Bank (SNB) reacted swiftly.

It could have just been a “fat finger” trade an hour before U.S. trading began. In an instant, the euro (FXE) vs Swiss Franc (FXF) currency pair (EUR/CHF) traded right down to the 1.20 floor before bouncing right back up in a flash.


A quick test of resolve - traders hit and get instantly rejected from the 1.20 floor on EUR/CHF

A quick test of resolve – traders hit and get instantly rejected from the 1.20 floor on EUR/CHF


Whatever it was, it was seemingly enough to kick the SNB into action. Early morning in Switzerland on December 18th, the SNB released the following news titled “Swiss National Bank introduces negative interest rates: Minimum exchange rate reaffirmed, and target range for three-month Libor lowered into negative territory“:

{snip}


The Swiss National Bank announces negative rates with the expected instant reaction weakening EUR/CHF

The Swiss National Bank announces negative rates with the expected instant reaction weakening EUR/CHF


This announcement firmly reminds traders and investors that the currency markets are an important sphere of influence to monitor. {snip}


The Australian dollar gains against the euro....

The Australian dollar gains against the euro….

The Australian dollar also gains on the British pound but has yet to break through Fed-related lows

The Australian dollar also gains on the British pound but has yet to break through Fed-related lows


Source for charts: FreeStockCharts.com

Given my strategy to fade rallies in the euro, I have avoided buying EUR/CHF directly to play anticipated action from the SNB. {snip} Overall, I strongly expect the currency market to resist the SNB’s push to weaken the currency. That is, the journey from here to a weaker Swiss franc will not be a straight line. The market may even deign to force the SNB’s hand yet again.

Be careful out there!

Full disclosure: short the Swiss franc, net short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on December 18, 2014. Click here to read the entire piece.)

Jan
15

Swiss National Bank Revises Forecasts Downward for Negative Inflation In 2015

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on December 11, 2014. Click here to read the entire piece.)

According to the Swiss National Bank (SNB), inflation is returning to negative territory in 2015. In its December 11, 2014 assessment of monetary policy, the SNB once again adjusted its inflation forecast downward.


Inflation goes negative in 2015 for Switzerland

Inflation goes negative in 2015 for Switzerland


Source: Swiss National Bank

The succession of downward forecasts for inflation make rising inflation in outer years look more and more optimistic. Despite the best efforts of the SNB to guard its 1.20 floor against the euro (FXE), inflation has proven next to impossible to resurrect in Switzerland. The currency market’s trigger response to the statement was to actually strengthen the Swiss franc (FXF) despite the SNB’s standard warning that “…the Swiss franc is still high.” At the time of writing, the Swiss franc got as low as 1.20169 (and dropping) in the EUR/CHF currency pair in the immediate wake of the policy statement.


EUR/CHF drops toward the 1.20 SNB floor in the wake of the December monetary policy assessment

EUR/CHF drops toward the 1.20 SNB floor in the wake of the December monetary policy assessment


Source: FreeStockCharts.com

The SNB’s challenge is that the European Central Bank will likely continue easing monetary policy which should in turn continue pressuring the euro lower. {snip}

There was also no mention of the SNB’s “victory” over the “Save Our Swiss Gold” referendum which would have surely made it next to impossible for the SNB to prevent a deepening of deflationary pressures in the economy. {snip}

GLD gapped down on the Friday before the vote and surged higher the Monday after the vote. The overall change was marginally higher, but I certainly did not anticipate that gold would lose as much as it did right before the vote.


The rally in SPDR Gold Shares (GLD)  off the recent lows has continued into December

The rally in SPDR Gold Shares (GLD) off the recent lows has continued into December


Source: FreeStockCharts.com

In choppy fashion, GLD has continued higher. This move likely has little to nothing to do with the Swiss vote which would have bolstered the price of gold. {snip}

Going forward, I remain bearish on the Swiss franc. This bearishness is effectively an extension of bearishness on the euro. As the euro goes lower one outstanding question is what measures will the SNB take “immediately” in the face of “an undesirable tightening of monetary conditions.”

Be careful out there!

Full disclosure: long GLD, short the Swiss franc

(This is an excerpt from an article I originally published on Seeking Alpha on December 11, 2014. Click here to read the entire piece.)

Jan
15

Swiss National Bank: “The Economic Outlook Has Deteriorated Considerably”

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on September 18, 2014. Click here to read the entire piece.)

With the Swiss franc (FXF) trading closer and closer to its 1.20 floor versus the euro (FXE), I find myself more interested than usual in the monetary policy decisions of the Swiss National Bank (SNB). In its September policy decision, the SNB starts off with the ominous observation: “The economic outlook has deteriorated considerably. The Swiss franc is still high…For Switzerland, the risk of deflation has thus increased again…”

{snip}

In line with this downgrade, the SNB has dropped its inflation forecast starting in mid-2015 because of “…the deterioration in the global economic outlook and slower growth in Switzerland.”


The SNB downgrades its inflation forecast

The SNB downgrades its inflation forecast


Source: Swiss National Bank

{snip}


The Swiss franc strengthens in response to a dire monetary policy statement from the SNB

The Swiss franc strengthens in response to a dire monetary policy statement from the SNB


Source: FreeStockCharts.com

Given the recent bounce, it seems the market is still not ready to test the SNB’s resolve to “purchase foreign currency in unlimited quantities” and if needed “take further measures immediately” to protect the 1.20 floor. {snip}

Be careful out there!

Full disclosure: short the Swiss franc

(This is an excerpt from an article I originally published on Seeking Alpha on September 18, 2014. Click here to read the entire piece.)

Jan
15

The Swiss Franc Quietly Returns to Early 2013 Levels

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on August 17, 2014. Click here to read the entire piece.)

In August, 2011, the Swiss National Bank (SNB) took a series of extreme measures to attempt to arrest an accelerating strengthening in the Swiss franc (FXB). These measures culminated in establishing a 1.20 floor against the euro (FXE) on September 6, 2011:

{snip}

The Swiss franc did continue to weaken for another two months until the market ever so slowly moved to test the SNB’s resolve. {snip}

In 2013, EUR/CHF delivered two small run-ups: the first maxed at 1.257 and the second maxed at 1.264. Ever since then, the franc has been a very “boring” currency as EUR/CHF has steadily drifted lower (franc strengthening). Over the last two weeks, the franc’s strength has suddenly accelerated, for example, sending EUR/CHF to a 19-month low.


The Swiss franc has yet to mount a credible run of weakness against the euro since the immediate aftermath of the SNB's floor

The Swiss franc has yet to mount a credible run of weakness against the euro since the immediate aftermath of the SNB’s floor

The franc's strength has suddenly accelerated in the past two weeks

The franc’s strength has suddenly accelerated in the past two weeks


Source: FreeStockCharts.com

It is easy to assume and claim that this sudden bout of strength is “safe haven” buying as a response to the increasing tensions in the Ukraine. {snip}


This index of some of Europe's top stocks has gone from a post-recession peak to a negative year-to-date performance in less than two months

This index of some of Europe’s top stocks has gone from a post-recession peak to a negative year-to-date performance in less than two months


Source: FreeStockCharts.com

Whatever the reason, it seems a perfect storm may be building over the franc once again that just might test the SNB’s resolve in coming weeks or months depending on how the potential catalysts listed above play out. Currency traders at least seem to lack any reason to “allow” the franc to depreciate in the near-term.

On August 13, 2014, Bloomberg ran a story on the franc’s strength titled “Mighty Franc Poses Challenge for Made-in-Switzerland Label.” The story contained several examples of Swiss companies losing profits and revenues due to the franc’s strength. However, the article never mentioned the currency’s impact on the economy as a whole. As it turns out, the franc’s strength has not sent Switzerland’s exports heading south. The chart below charts exports priced in millions of Swiss francs on the left axis versus the value of USD/CHF on the right axis.


Since at least 2007, Swiss exports have held steady within a wide range nearly independent from the value of the currency

Since at least 2007, Swiss exports have held steady within a wide range nearly independent from the value of the currency


Source: TradingEconomics.com

{snip}


Switzerland is only just now climbing out of a period of disinflation

Switzerland is only just now climbing out of a period of disinflation


Source: SNB Monetary policy assessment of 19 June 2014

Switzerland’s GDP growth has yet to return to pre-recession levels. Yet, overall, the Swiss are enjoying a remarkable combination of conditions: ultra-low interest rates, a strong (almost impervious) currency, relatively stable export values, and no inflation.

The Swiss franc has been a relatively “boring” currency for a long time now. That stasis may soon change…

Be careful out there!

Full disclosure: net long Swiss franc

(This is an excerpt from an article I originally published on Seeking Alpha on August 17, 2014. Click here to read the entire piece.)

Jan
13

T2108 Update (January 13, 2015) – Pause Interrupted

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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 42.5%
T2107 Status: 45.5%
VIX Status: 20.6 (up 4.9%)
General (Short-term) Trading Call: Bearish
Active T2108 periods: Day #59 over 20%, Day #18 above 30%, Day #5 above 40% (overperiod), Day #9 under 50%, Day #27 under 60%, Day #129 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
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).

Commentary
Friday’s perfect pause for the S&P 500 (SPY) has definitively given way to another breakdown of the 50-day moving average.


The S&P 500 slips under its 50DMA yet again

The S&P 500 slips under its 50DMA yet again


With T2108 closing essentially flat in a perfect stalemate on the day, I would have concluded nothing of concern from the S&P 500’s latest failure to hold 50DMA support. The day even featured a positive sign with the index breaking ABOVE its 50DMA at one time. However, the Australian dollar (FXA) versus the Japanese yen (FXY) (AUD/JPY) delivered a fresh warning with a 200DMA breakdown during the trading day.


That warning is ringing all the louder at the time of typing as AUD/JPY continues to sink quick, fast, and in a hurry. The tell-tale currency pair has now broken below December’s low and seems like a lock to retest October’s low. I cannot imagine this retest happening without dragging the S&P 500 down as well. Thus, I have definitively changed my trading call to bearish for the first time in a long time.


A very bearish breakdown for the Australian dollar versus the Japanese yen

A very bearish breakdown for the Australian dollar versus the Japanese yen


The palpable cause for concern is a sudden plunge in copper prices in the early hours of Asian trading. This chart was posted on stocktwits just as I was trying to find out the catalyst for a sudden plunge in the Australian dollar across all major currencies.


Copper plunges

Copper plunges


Source: StockTwits post

This augurs very poorly for trading as so many assume that so goes copper, so goes the global economy. With the on-going collapse in commodities, this fresh plunge in copper is like the next shoe to drop. Indeed, during U.S. trading Freeport-McMoRan Inc. (FCX) crumbled 7.6%. At first blush, I somehow thought going ex-dividend had something to do with the drop. In retropsect, the plunge had to be more than a dividend payout. FCX is now back to December’s low.


FCX: The next shoe to drop?

FCX: The next shoe to drop?


I think this is enough said for the prospects of trading on Wednesday, January 14th. The only caveat I can muster is that AUD/JPY has already extended well below its lower-Bollinger Band (BB) so some kind of snapback should be expected. But all things considered, I have to assume such a bounce will be as temporary as the last one.

Volatility is also hanging tough. I am now on alert for a major run-up and spike higher. I will be waiting for T2108 to drop at least below 30% before I consider adding to my volatility fade. I will sell my small position in ProShares Short VIX Short-Term Futures (SVXY) if I get another shot at a small profit before this presumed run-up.


Volatility hangs tough

Volatility hangs tough


I think the odds of T2108 trading down to oversold conditions before the end of this month just shot up considerably. As usual, I will look to buy on such a turn of events. Given my assumption of on-going chop in the market, I am still avoiding over-reacting to any one day’s movement. Instead, my bearish bias just green lights fading rallies and playing follow-through from breakdowns.

I end with a chart on Tesla Motors (TSLA). I last pointed out TSLA a month ago when it generated a bearish follow-through to a 50/200DMA breakdown. The Santa Claus rally helped it to recover only to hit and fail at resistance that has also led to more bearish follow-through. I mention this because TSLA plunged below its December low in after-hours trading after Elon Musk mentioned disappointing sales in China. He later tried to clarify the situation as temporary and based on misperceptions about Tesla’s charging capabilities. The market may not have anticipated such a hiccup but this was certainly a bad time to make such statements with the stock setup like a classic short. And now general market weakness will work further against a rapid recovery from the latest swoosh lower.


Tesla Motors (TSLA) sets up as a classic short

Tesla Motors (TSLA) sets up as a classic short


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
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: net short Australian dollar, long SVXY, long FCX, short TSLA, long TSLA call spread (essentially zero now!)

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