ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
May
3

T2108 Update (May 3, 2016) – Overbought Status Finally Ends As the NASDAQ Teeters

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: 65.3% (ends an epic 44-day overbought period!)
T2107 Status: 57.4%
VIX Status: 15.6
General (Short-term) Trading Call: cautiously bearish
Active T2108 periods: Day #56 over 20%, Day #55 over 30%, Day #52 over 40%, Day #49 over 50%, Day #45 over 60%, Day #1 under 70% (ends 44 days over 70% – overbought period)

Commentary


In the last T2108 Update, I feared an imminent end to this extended overbought period. Today was the day. T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), plunged soon after the open and buyers this time were unable to save the day. The close at 65.3% marks the end of a 44-day overbought period and marks the first time I have changed my trading call to bearish in a very long time. I included the “cautious” caveat since the S&P 500 still enjoys support from its 50DMA.


The heaviness of T2108 finally gave way to an end of overbought status for T2108

The heaviness of T2108 finally gave way to an end of overbought status for T2108

The S&P 500 is down 3 of the last 4 days and is churning above 50DMA support

The S&P 500 is down 3 of the last 4 days and is churning above 50DMA support


The S&P 500 (SPY) started the overbought period on March 1st. The overbought period ended with a 4.3% gain over that period. This is about half the expected performance based on the history of overbought periods since 1986 although there are few overbought periods that have lasted as long as this most recent one.


S&P 500 Performance By T2108 Duration Above the 70% Threshold

S&P 500 Performance By T2108 Duration Above the 70% Threshold


Adding to the bearish danger is T2107, the percentage of stocks trading above their respective 200DMAs. T2107 has broken off from its primary uptrend that has defined most of the bullish run of the last overbought period. Although the 20DMA uptrend remains intact for T2107, the break from the primary uptrend is more of a concern with T2108 ending the overbought period.


T2107 is still in an uptrend. Can it hang in there to maintain hope for a fresh bullish run for the market?

T2107 is still in an uptrend. Can it hang in there to maintain hope for a fresh bullish run for the market?


The NASDAQ (QQQ) has already entered bearish territory with a breakdown below its 200DMA support last Thursday, a 50DMA breakdown the next day, and what looks like a confirmation of that breakdown today. This was enough for me to load up on QQQ put options and follow my new bearish trading call.


The NASDAQ is breaking down

The NASDAQ is breaking down


Ironically, the NASDAQ broke down just as Apple (AAPL) FINALLY experienced an up day after 8 straight days of losses. Suddenly, AAPL looks like it is bottoming given the previous two days featured hammer candlestick-like patterns. AAPL provides a sliver of hope for the NASDAQ to survive its growing breakdown.


Is Tim Cook finally putting some of those billions to work on buying back stock?

Is Tim Cook finally putting some of those billions to work on buying back stock?


The volatility index, the VIX, actually could not hold its high of the day and settled close to the 15.35 pivot. It is hard to see the VIX taking off just yet. Still, I decided to load up on call options on ProShares Ultra VIX Short-Term Futures (UVXY) as part of my bearish trading call. I do not plan to add any more bearish T2108 trades until the bear call gets confirmed further. (Note that my trades in anticipation of a rally to start May’s trading – puts on UVXY and shares of roShares Short VIX Short-Term Futures (SVXY) – worked out just as I had hoped when I wrote about them in the last T2108 Update.)


The VIX is still wrapped around the 15.35 pivot. Is it getting ready to launch?

The VIX is still wrapped around the 15.35 pivot. Is it getting ready to launch?


Caterpillar (CAT) has not confirmed a bearish turn in market sentiment. While CAT is still trading down from April earnings, the stock remains comfortably above 50DMA support.


Caterpillar, Inc. (CAT) is looking toppy, but sellers have to break 50DMA support before CAT looks bearish again.

Caterpillar, Inc. (CAT) is looking toppy, but sellers have to break 50DMA support before CAT looks bearish again.


As an example of a stock that has fallen from the ranks of contributors to T2107, I show the post-earnings chart of Mellanox Technologies, Ltd. (MLNX).


Mellanox Technologies, Ltd. (MLNX) is breaking down and looks ready to fill post-earnings January's gap up

Mellanox Technologies, Ltd. (MLNX) is breaking down and looks ready to fill post-earnings January’s gap up


Another example is First Solar (FSLR). Fickle solar investors are losing patience again. FSLR cracked 200DMA support following April earnings and has sold off every day since.


First Solar (FSLR) breaks down from 200DMA support.

First Solar (FSLR) breaks down from 200DMA support.


For those interested in currencies, I strongly recommend seeing my latest posts on the Australian dollar (FXA) and the Japanese yen (FXY). In both cases, I think the market is on the edge of big unwinds of exceptionally large net long positions. Since I look to AUD/JPY as a currency-based indicator of market sentiment, I am VERY interested in how these dynamics unfold. At the moment, the weakness of the Australian dollar is winning out over the weakness of the Japanese yen. AUD/JPY has broken the April low which confirms my bearishness.


AUD/JPY continues its bearish breakdown

AUD/JPY continues its bearish breakdown


Another interesting development in foreign exchange is the potential blow-off bottom for the U.S. dollar index. Until now, conventional wisdom has insisted that the market needed dollar weakness to support earnings and stocks. Yet, the breakdown and acceleration of losses in the past 4 days has accompanied notable market weakness. The dollar was well below its lower-Bollinger Band (BB) when buyers finally stepped in to provide relief. This looks like a blow-off bottom to me. Needless to say, a new low should take the dollar a lot lower.


Has the U.S. dollar finally bottomed?

Has the U.S. dollar finally bottomed?


I took this moment as a signal to finally take profits on my position in CurrencyShares Canadian Dollar ETF (FXC). It was a great run that I wish I had timed a little better!


CurrencyShares Canadian Dollar ETF (FXC) has gone nearly straight up for almost 4 months. Time for a rest?

CurrencyShares Canadian Dollar ETF (FXC) has gone nearly straight up for almost 4 months. Time for a rest?


The accelerated weakness in the dollar has not even helped emerging markets. The iShares MSCI Emerging Markets ETF (EEM) gapped down into support at its 50 and 200DMA. My last trade of call options is essentially worthless now. Yet, at this critical juncture, I think it makes a lot of sense to get back to my more traditional play of out-of-the-money call and put options (an options strangle).


iShares MSCI Emerging Markets (EEM) is on the edge of a breakdown

iShares MSCI Emerging Markets (EEM) is on the edge of a breakdown


A rebound in the dollar could spell trouble for the great rally in commodities. Already, the iron ore plays have stumbled. BHP Billiton Limited (BHP) gapped down to its 200DMA support. I am still working the iron ore pairs trade here.


BHP Billiton Limited (BHP) has so far topped out with its last report on the business.

BHP Billiton Limited (BHP) has so far topped out with its last report on the business.


The biggest caveat on the looming bearish story is Friday’s U.S. jobs report. I cannot be clear on what scenario creates a bullish response from the market, but I am bracing for a big reaction either way given this imortant moment for the market. It IS the month of May after all…

— – —

For readers interested in reviewing my trading rules for an oversold 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).

(Reload page and/or click on the image, if it is not correct. At time of writing, server is having cache issues)


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 UVXY call options, long QQQ put options, short BHP, long BHP call options, short AUD/JPY, long EEM call options

May
3

Japanese Yen: Maximum Bullishness Meets Maximum Search Interest – A Fever Ready to Break?

written by Dr. Duru
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Traders remain very confident in the strength of the Japanese yen (FXY). Net longs stayed at “maximum bullishness” even ahead of last week’s monetary policy meeting by the Bank of Japan (BoJ).


"Maximum bullishness" on the Japanese yen - traders have not been this bullish on the yen since at least 2008.

“Maximum bullishness” on the Japanese yen – traders have not been this bullish on the yen since at least 2008.


Source: Oanda’s CFTC’s Commitments of Traders

That boldness paid off as the BoJ failed to deliver more easing, and the yen soared. USD/JPY dropped to levels last seen October, 2014 in what now looks like a major top.


A major (multi-year) top/plateau for USD/JPY?

A major (multi-year) top/plateau for USD/JPY?


Source: FreeStockCharts.com

In the midst of this dramatic turn in sentiment for the yen, I stumbled upon another soaring indicator. Google Trends, an index of the popularity of search terms, shows searches for “Japanese yen” breaking out at the end of 2014 just as USD/JPY was in its final run-up. The search index reached a new all-time high in last month.


Searchers are at maximum interest in the Japanese yen.

Searchers are at maximum interest in the Japanese yen.


Source: Google Trends

I typically use Google Trends as a sentiment indicator. I like to assess whether the trends or, even more importantly, the extremes in moves are consistent or contrary to other important indicators. In this case, I am comparing Google Trends with the price level of the Japanese yen currency pairs. Note that Google trends broke out just as USD/JPY was running up to multi-year highs (multi-year cheapness for the yen). If I had been looking then, I would have guessed the run-up was coming to an end. In other words, the extreme in USD/JPY was not being confirmed by Google Trends.

Now, indicators are all pointing in favor of yen strength. Yet, sentiment seems to be reaching feverish levels. I know I am early in anticipating a bottom for USD/JPY (100 seems like destiny right now!), but I am now adding a top in Google Trends as a potential sign that the fever will break sooner than later (the timing will never be precise). Note well that while Google Trends reached a new all-time high in April, the momentum in 2016 has definitely slowed. If Google Trends hits a fresh new high, I will need to revisit my assessments.

In the meantime, I am sticking with my strategy of slowly accumulating a long USD/JPY position while fading all other currencies against the yen, especially the British pound, for shorter term trades.

Be careful out there!

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

May
2

The Australian Dollar Sinks With An RBA Rate Cut – Time for A Big Unwind?

written by Dr. Duru
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Last week, the Australian dollar (FXA) was slammed by poor inflation data. Market expectations for a rate cut strengthened significantly as well. This week, the Reserve Bank of Australia (RBA) took heed and cut its cash rate from 2.0% to 1.75%.

In its statement on the monetary policy decision, the RBA explained that its decision “…follows information showing inflationary pressures are lower than expected.” Moreover:

“Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

Keeping to the more sober tone, the RBA observed a very mixed outlook on the global and emerging economies, China included. Heightened uncertainty has accompanied these mixed performances. In Australia, growth has moderated a bit.

The RBA was even barely cheered by the recent run-up in commodity prices:

“Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.”

Finally, the RBA assured markets that the drop in the interest rate would not adversely impact the housing market given “supervisory measures” have succeeded in containing the potential for an overheated market.

The RBA’s only reference to the Australian dollar was to note that its strength could complicate the on-going rebalancing in the economy away from the mining sector. The RBA chose not to hint at whether this rate cut starts a new downward cycle in rates or whether it would act against the strength in the Australian dollar. So, while this rate cut SHOULD generate sustained selling, it is always possible that traders will somehow conclude that the RBA has finally finished with rate cuts. Such a conclusion would support even more buying and strength. It is helpful to remember that speculator ran up the tab on long Australian positions ahead of the RBA decision to cut rates…


Speculators have not been THIS bullish on the Australian dollar in three years!

Speculators have not been THIS bullish on the Australian dollar in three years!


Source: Oanda’s CFTC’s Commitments of Traders

For now, I am going to bet on a significant unwind from these aggressively bullish positions on the Australian dollar until/unless today’s losses get reversed. I closed out my short on AUD/JPY and am looking for the next fade (I am increasingly leery of a surprise Bank of Japan jack move). I have put a hold on accumulating a larger position short GBP/AUD(when is Brexit going to flare again as an issue? Just weeks to go for the vote!), and I am going back to shorting AUD/USD (going long felt sooo uncomfortable!). When the inflation numbers slammed the Australian dollar last week, I concluded that the stubbornly persistent rally had come to an end. The break in 50DMA support on AUD/USD seems to confirm this conclusion…like a 1-2 punch of catalysts.


AUD/USD breaks 50DMA support as the run-up in the Australian dollar comes to an end.

AUD/USD breaks 50DMA support as the run-up in the Australian dollar comes to an end.

AUD/JPY makes an ominous new low below the April low. I am bracing myself for getting bearish on the stock market soon.

AUD/JPY makes an ominous new low below the April low. I am bracing myself for getting bearish on the stock market soon.


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: short GBP/AUD, short AUD/USD

May
2

The iShares Nasdaq Biotechnology ETF Clings to Support After Reversing Breakout

written by Dr. Duru
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At the current pace of trading The iShares Nasdaq Biotechnology ETF (IBB) will not likely recover its losses from the “Clinton Bash” before the November elections.

The iShares Nasdaq Biotechnology ETF (IBB) failed to build on its momentum from last month’s breakout from consolidation. IBB is now clinging to support at its 50-day moving average (DMA).


The iShares Nasdaq Biotechnology ETF (IBB) is still struggling to sustain some momentum.

The iShares Nasdaq Biotechnology ETF (IBB) is still struggling to sustain some momentum.


Source: FreeStockCharts.com

After I wrote about buying IBB with confidence, I managed to make one winning and one losing trade using call options to net roughly even. The lack of sustained momentum hurt last week’s attempt. As IBB struggled today to hold 50DMA support, I decided to make one last trade on call options even though technically IBB has reversed and broken April’s breakout. Violation of 50DMA support will put IBB right back into bear territory.

Seeking Alpha author Ed Wijaranakula lays out a great guide for upcoming trading catalysts for IBB in “IBB Expecting A Rebound Ahead Of ASCO.” Specifically:

“Investors actually may want to avoid the biotech sector altogether during the weeks that the Senate Special Committee on Aging conducts their hearings on drug prices, as it has been a disaster for the IBB ETF in the past. Prior to Wednesday, the Senate Special Committee on Aging had conducted two hearings on drug pricing, one on December 9 and the other on March 17, when the IBB sold off 3.57% and 4.05%, respectively, during the week of the hearing. IBB, however, recovered 3.63% and 1.71%, respectively, during the week after the hearing. If history repeats itself, we expect IBB to recoup some of its losses this week…”

In other words, politics and regulation are going to weigh heavily on IBB for some time to come. In my book, such catalysts make IBB a poor investment in the current climate. IBB should still be good for shorter-term trades. I will do better going forward keeping these big calendar events on the radar as they can easily trump technicals. Hopefully, my timing this week works out just right.

Be careful out there!

Full disclosure: long IBB call options

May
1

Warren Buffett Is Tone Deaf on Diversity

written by Dr. Duru
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Warren Buffett, CEO of the legendary Berkshire Hathaway (BRKA)(BRKB), rightfully sits among the most respected and highly regarded business leaders in American history. When Buffett talks, it matters: his opinions can shape minds and drive business practices. Buffett’s influence and potential for tremendous good turn Berkshire’s annual shareholder meeting into a mega-event.

This year’s mass migration to Omaha, Nebraska was broadcast and streamed live for the first time by Yahoo Finance. Honestly, I was never interested in following this meeting or the commentary that came out of it until Yahoo advertised this momentous occasion. The video stream caught my attention, and I was riveted. The investor meeting was entertaining, educational, sobering, and inspirational all at the same time.

Yet, there was at least one moment that stirred me from my blissful admiration. That moment arrived around the 4:05:00 mark when Buffett and Vice Chairman Charlie Munger answered a shareholder question on diversity. Their collective response was so disappointing, so rambling, so underwhelming, and so misdirected that Berkshire sounded completely tone deaf on the diversity issue. At one point, Buffett even sounded stubbornly insensitive. The whole display seemed out of character within the context of Berkshire’s desire to have a positive impact on the world. I had to conclude that Buffett and Munger are not quite clear on the “diversity issue” when applied in the corporate and organizational context.

I need to quote the full specifics of the discussion before proceeding with my critique.

Andrew Ross Sorkin from CNBC asked the question on behalf of Arits Galdoz (spelling?). Sorkin indicated that several other shareholders had asked similar questions. I transcribed the conversation as accurately as possible: my disbelief motivated me to confirm exactly what I think I heard…

From Sorkin:

“About two dozen men and women work with you Warren at our corporate office. I see from last year the quality of the picture in the annual report has been improved so congratulations on that. However, looking at it, there is something that comes to anyone’s attention, and it is the lack of diversity among the staff. A 2015 analysis by Calvert Investments found that Coca-Cola (KO) was one of the best companies for workplace diversity while Berkshire Hathaway was one of the worst. You’ve explicitly stated that you do not consider diversity when hiring for leadership roles and board members. Does that need to change? Are we missing any investment opportunities as a result? And do you consider diversity, however defined, of company leadership and staff in the value of a company that you may want to purchase?”


The staff at the headquarters of Berkshire Hathaway, Inc. (Christmas time?)

The staff at the headquarters of Berkshire Hathaway, Inc. (Christmas time?)

Another picture of the staff at the headquarters of Berkshire Hathaway, Inc.

Another picture of the staff at the headquarters of Berkshire Hathaway, Inc.


Source: Berkshire Hathaway, Inc. 2015 Annual Report

For reference, here is a relevant quote from the summary of the 2015 Calvert Report titled “Examining the Cracks in the Ceiling: A Survey of Corporate Diversity Practices of the S&P 100“:

“Based on the 10 diversity criteria in the Calvert report, the overall highest-rated companies are: Bristol-Myers Squibb, Citigroup; Dow Chemical, Eli Lilly; Lockheed Martin; Merck; Microsoft; PepsiCo; Target; and Wells Fargo. (ten companies tied for first place.) The four lowest-rated companies are: Berkshire Hathaway; Simon Property Group; National Oilwell Varco Inc.; and Twenty-First Century Fox. Companies that achieved the most improvement: Philip Morris International; Schlumberger; and Occidental Petroleum.”

Buffett’s response to the diversity question:

“The answer to the last question is no. What was the one before it? [audience laughs and Sorkin repeated the question].

We will select board members, and we lay it out, we’ve done so for years. And I think we have been much more explicit than most companies. We are looking for people who are business savvy, shareholder-oriented, and have a special interest in Berkshire. And we found people like that. As a result, I think, I think we’ve got the best board that we could have. They’re clearly not in it for the money.

I get called by consulting firms who’ve been told to get candidates for directors for other companies. By the questions they ask it’s…clearly they’ve got something other than the three questions we ask in terms of Directors in mind. They really want somebody whose name will reflect credit on the institution which means a big name. One organization recently – the one that did the blood samples with small pricks – they got some very big names on their board. And Theranos [got verification from Munger on pronunciation], the names are great, but we are not interested in people that want to be on the board because they want to make 200 or 300,000 dollars a year for 10% of their time. And we’re not interested in the ones for whom it’s a prestige item and who want to go and check boxes and that sort of thing.

So I think we’ve got…we will continue to apply that test: business savvy, shareholder-oriented, and with a strong personal interest in Berkshire.

And every share of Berkshire that our shareholders own is bought just like everybody else in this room. They haven’t gotten them on option. I have been on boards where they’ve given me stock. I get it for breathing. Maybe half a dozen places, maybe 3 or 4 places, where I was on the board of. We want our shareholders to walk in the shoes, I mean Directors to walk in the shoes of the shareholders. We want them to care a lot about the business. And we want them to be smart enough so that they know enough about business; they know what they should get involved in and what they shouldn’t get involved in.

The people in the office – I’m hoping that when we take the Christmas picture again this year, they’re exactly the same 25 that were there last year although we might have added 30,000 employees elsewhere. Maybe $10B of sales or something like that. It’s a remarkable group of people.

And they, just take this meeting..virtually every one of the 25…they have been doing job after job connected with making this meeting a success and a pleasant outing for our shareholders. It’s a cooperative effort. The idea that you would have some department called annual meeting department. You’d have a person in charge of it and she or he would have an assistant that would go to various conferences about holding annual meetings and they hire consultants to come in and help them run the meeting. We just don’t operate that way. It’s a place where everybody helps each other [audience applauds].

Part of what makes my job, well my job is extraordinarily easy, well the people around me really make it easy. And part of the reason it is easy is because we don’t have any committees. Maybe we have some committee I don’t know about. I’ve never been invited to any committees – I’ll put it that way – at Berkshire. We may have a Powerpoint someplace, I haven’t seen it and I wouldn’t know how to use it anyway. We just don’t do, we don’t have make-work activities. We might go to a baseball game together or something like that. I’ve seen the other kind of operation, and I like ours better. I’ll put it that way. Charlie?”

Munger’s response:

“Well years ago I did some work for the Roman Catholic Archbishop of Los Angeles. And my Senior Partner pompously said you don’t need to hire us to do this. There some plenty of good Catholic tax lawyers. And the Archbishop looked at him like he was an idiot and said ‘Mr. Peeler, last year I had some very serious surgery. And I did not look around for the leading Catholic surgeon.” [Audience laughs]. That’s the way I feel about board members. [Audience applauds. Warren pops open a can of Coke.]”

If not for Munger’s curt response, a listener could be excused for having forgotten Buffett just responded to a question about diversity. Buffett never uttered the word “diversity.” Buffett barely even confirmed his lack of interest in policies of inclusion – like the mere mention of diversity and inclusion insult his business intelligence. His response was defensive at times as if the question accused Buffett of favoritism, or even worse, some kind of bigotry. The unfortunate meandering missed a GREAT opportunity for Buffett to affirm his laudable intentions to establish principles of fairness and meritocracy. This miss was worsened by the misplaced laughter and applause of the audience that surely reinforced the trench Buffett dug with his heels.

The question on diversity did not ask or require Buffett to fire anyone to meet a diversity quota. The question did not ask Buffett to lower his standards. The question certainly did not ask Buffett to introduce self-interested gold prospectors onto his board. The question simply asked Buffett to open his eyes wide and free his mind sufficiently enough to ask why his workforce does not reflect the diversity we should expect in an American company. The diversity question tried to speak the language of business in pointing out that the company is likely forgoing valuable business opportunities by behaving in such an insular manner. We should no longer accept that fairness among friends, associates, and others who look and think like the leader equates to fairness in the absolute. Not in America.

In other words, the diversity question looks beyond active discrimination to ask corporate leaders to commit to ensuring their companies are proactively reaching out to a diverse pool of qualified candidates. This question has hung in America’s atmosphere for DECADES now. Those of us looking forward to a truly inclusive country suffer from a dream deferred.

The diversity question seeks to break the self-reinforcing dynamics of building a workforce out of personal familiarity. Berkshire seems locked into an entrenched workplace dynamic. I fully understand the benefits of retaining a core group of proven talent. No responsible manager would intentionally let such a team dissolve or contract. However, Buffett’s defense of his dedicated crew of superstars missed the core question: when it comes time to hire someone new, for whatever reason, is Buffett willing to look beyond the limited recommendations born out of personal familiarity? A simple “yes” could have put to rest a lot of concerns.

Buffett demonstrated a similar tone deafness when talking about the extended tenure of Berkshire’s managers. In responding to an earlier question, Buffett proudly proclaimed that his managers have had very long tenures because they enjoy their jobs and do not work for the money. Buffett also quipped that he constantly reminds the board that the lack of a retirement age has contributed to this low turnover. So why not in response to the diversity question simply assure the audience that the selection process for replacing the few departing managers includes the broadest practical pool of qualified candidates. Instead, Buffett insisted on demonstrating that he rewards this loyalty with a related commitment to managerial stasis. The lack of change at the top comes through loud and clear in the following quote from the end of the 2015 letter to shareholders in the annual report:

“Can you imagine another very large company – we employ 361,270 people worldwide – enjoying that kind of employment stability at headquarters? At Berkshire we have hired some wonderful people – and they have stayed with us. Moreover, no one is hired unless he or she is truly needed. That’s why you’ve never read about ‘restructuring’ charges at Berkshire.”

Mr. Buffett, you need more diversity.

The diversity question recognizes that opportunity suffers when leaders lack the vision to understand the potential improvement from an expanded search for talent. This quest does not require consultants, but it does require a fundamental dissatisfaction with a status quo of benign neglect. This quest requires an expanded appreciation for what it means to exercise concern for the health and economic well-being of the country. This quest requires tonal sensitivity.

Munger’s response to the diversity question was particularly unfortunate. Munger refocused the audience back to the original question of diversity, but he blanketed the issue with a myopic, sub-optimal viewpoint. His recount of the insulted Archbishop implied that seeking diversity requires lowering standards in order to benefit one’s chosen group of identification or affinity. Munger’s Senior Partner was not talking about diversity. A diversity question would have asked the Archbishop to give the legal firm a fair and equal opportunity at winning the business even though the leadership did not belong to the Roman Catholic Church. By twisting the story around, Munger proved himself to be as tone deaf as Buffett.

Perhaps the most unfortunate reference in the response appeared when Buffett struck a glancing blow at the now maligned Theranos. Theranos is a biotech firm founded and led by Elizabeth Holmes. Holmes dropped out of Stanford and rose to fame by pursuing her vision of democratizing medicine by making lab testing accessible to everyone. Over the past year or so, the company has faced increased scrutiny from the Wall Street Journal and regulators for its medical practices. The Department of Justice is even investigating Theranos for fraud. Regulators may ban Holmes (and her CEO) from owning or running a lab for two years – a move that would surely end her career in the medical field and completely destroy her credibility. By choosing the big name, “celebrity” board of Theranos as a presumed example where diversity does not work, Buffett implied to the discerning listener Theranos is also an example of what happens when a woman is allowed to run the show without proper supervision. Now, I am pretty sure Buffett did NOT intend that we make such an inference; I believe he was singly targeting the incompetence of a board that was not selected for the right reasons. However, a modicum of understanding of the question at hand with diversity would have helped Buffett steer clear of this unnecessary and questionable diversion.

I cannot say it enough: diversity is not about stuffing boards with self-interested, unqualified egomaniacs or about removing people from their jobs and replacing them according to some prescribed formula. The diversity question is about understanding the necessary link between the health of American business with the health of the pipeline of opportunity for the broad spectrum of America’s people. I fundamentally refuse to believe that comprehension of the true meaning and value of diversity is beyond the grasp of a man like Warren Buffett who has otherwise proven himself dedicated to doing the right thing, to promoting confidence and optimism in the strength of America, and to singing the praises of hard work and clarity of thought.

My heart-felt claim for Warren Buffett: you are NOT out of options!




The performance of Berkshire Hathaway (BRKB) surely speaks for itself. Yet, should that success also seal the company from the diversity question?

The performance of Berkshire Hathaway (BRKB) surely speaks for itself. Yet, should that success also seal the company from the diversity question?


Source: FreeStockCharts.com

Full disclosure: long YHOO

Apr
30

AT&T Greatly Increases the Cost of Cutting the Cord

written by Dr. Duru
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AT&T (T) has apparently lost patience with customers who forgo TV packages to stream content with internet-only service. The company’s newest pricing model greatly increases costs for these “cord-cutters.”

On April 29, 2016, I received an email from AT&T (T) announcing a dramatic change to the company’s internet service. No longer will AT&T tolerate unlimited use of internet bandwidth at current prices. AT&T has decided to implement a pricing model for its internet service that is very similar to the model it uses for data plans on smartphones.

Starting May 23, 2016, AT&T will establish a usage limit on internet service. If customers exceed that limit, AT&T will charge them $10 for each 50GB in excess of the limit. At least AT&T will cap the overage charge at $100 per month. I imagine heavy users of streaming services like Netflix (NFLX), Hulu, and YouTube can easily hit the allowance every month. Cord-cutters, like myself, are exactly the customers most likely to fall into this category of heavy user. For this reason, I feel AT&T’s policy directly targets cord-cutters.

At the time of writing, AT&T does not provide specifics on the allowance or offer a way to review past internet usage. Customers may not be able to gauge their risk for exceeding AT&T’s internet allowance until after May 23rd.

There are two things customers can do to reduce the cost of heavy internet use. My preferred option is to pay an additional $30/month to retain the “privilege” of unlimited internet use. This represents a VERY painful 67% price increase! AT&T also offers a bundling option. If customers subscribe to DIRECTV® or U-verse TV, AT&T will provide unlimited internet service. The bundle option is more expensive because of the leasing charge for a cable box and the minimum $100/$110 (DirectTV/U-Verse) customers must spend on the bundle with internet service minimally good enough for streaming. Separately, the lowest option for TV (DirectTV or U-Verse) is $50 and for minimal internet is $40. AT&T no longer offers a bargain basement option that only provides local TV channels.

Here is the message AT&T sent to customers:

“Beginning on May 23, 2016, we will be increasing the U-verse® Internet data allowance for many customers. After a grace period, and as our agreement provides, there’s a $10 charge for each 50GB of data you use over the allowance amount. The maximum overage charge will be $100/mo. If you choose to bundle your U-verse Internet with DIRECTV® or U-verse TV you will be provided an unlimited Internet data allowance with a $30 value at no additional charge, as a benefit of bundling. Or if you choose, an unlimited allowance is available for purchase as an optional bolt-on to your Internet service for an additional $30/mo.”

Notice how AT&T cleverly attempts to use marketing to ease the pain of this message. AT&T starts by giving the “good news” that data allowances have increased. Of course, customers had no idea AT&T had a data allowance in the first place. Next, AT&T positions the $30 price increase for unlimited internet as an added value of choosing a bundled option. Bottom-line, cord-cutting just got a lot more expensive!

I will very likely abandon ship and cut over to Comcast (CMCSA), aka Xfinity, for internet service. However, I strongly suspect Comcast will one day adopt AT&T’s anti-cord-cutting pricing model. For now, cord-cutters can get Comcast’s internet service minimally good enough for streaming for $50. For another $10, customers can get 10 local TV channels. For a limited time, customers who order this package online will also get HBO streaming through the Xfinity app. Given the issues I have had with my HD antenna’s ability to receive local TV channels, I just MIGHT consider spending the extra $10 bucks….but I doubt I will go there anytime soon.

UPDATE. In certain areas of the country, Comcast implements what it calls “data usage plan trials” for certain customers. These plans generally enforce a 300GB cap. Customers can get unlimited internet by paying an extra $30-35 per month or by signing up for some other bundled plan. This is exactly the same pricing model as AT&T. I was just not aware of it since I have not had Comcast internet in a long time. In other areas of the country, Comcast gave up on caps. Here is Comcast’s explanation:

“Effective May 17, 2012, we suspended enforcement of our previous 250 GB static cap while we trialed more flexible data usage plans. Our goal is to provide options that benefit consumers while also ensuring that all of our customers enjoy the best possible Internet experience over our high-speed Internet service. To accomplish this, we have been trialing improved data usage management approaches that are in step with plans that other Internet service providers in the market are using and will provide our customers with more choice and flexibility than our previous static cap.”

Comcast’s plans and rules and limitations are numerous and a bit involved. So before signing up for Comcast internet, I am definitely going to call and the details that apply to my specific locale!


The stock for AT&T (T) recently broke out to a new post-recession high but has yet to achieve the glory of past years.

The stock for AT&T (T) recently broke out to a new post-recession high but has yet to achieve the glory of past years.

Cord-cutters are clearly not disturbing the business of Comcast (CMCSA). Its stock has soared for years and is at all-time highs.

Cord-cutters are clearly not disturbing the business of Comcast (CMCSA). Its stock has soared for years and is at all-time highs.


Source: FreeStockCharts.com

Apr
29

T2108 Update (April 29, 2016) – An Ominous Close Call for the Extended Overbought Rally

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: 71.1% (66.0% at the intraday low)
T2107 Status: 59.9%
VIX Status: 15.7 (17.1 at the high)
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #55 over 20%, Day #54 over 30%, Day #51 over 40%, Day #48 over 50%, Day #44 over 60%, Day #43 over 70% (Thursday ended 11 days over 80%) (overbought)

Commentary


Today was a close-call for this now 43-day old overbought period. For the second day in a row, sellers got active. This selling flared right after I wrote about the market’s proven resilience with T2107, the percentage of stocks trading above their respective 200DMAs, reaching new rally highs despite the difficulties in tech stocks. Buyers rallied just enough into the close to keep T2108, the percentage of stocks trading above their respective 40DMAs, above the overbought threshold of 70%.


Ever so slowly, T2108 is getting "heavier." A break of overbought status looks imminent!

Ever so slowly, T2108 is getting “heavier.” A break of overbought status looks imminent!


T2108 has spent almost two months churning around in overbought territory. A very subtle downtrend has taken hold with today’s brief break of overbought status confirming the indicator’s increasing “heaviness.” I am keeping my trading bias at cautiously bullish, but a complete break of overbought status seems imminent. This juncture is important because the end of an extended run in overbought conditions typically happens at the front end of a sell-off. Interestingly, the S&P 500 is now under-performing projections of performance for an overbought period of 43 days in length.


S&P 500 Performance By T2108 Duration Above the 70% Threshold

S&P 500 Performance By T2108 Duration Above the 70% Threshold


The good news is that each day of duration for this overbought period linearly adds to the expected performance of the S&P 500 (SPY). The S&P 500 has gained 4.4% so far during this overbought period. This performance runs below the roughly 6% to 7% I expect from this overbought period. To meet expectations, the S&P 500 will need to springboard from this 2-day sell-off to go on a freshly invigorated run-up. Such a bounce would be consistent with the hammer like candlestick pattern from Friday’s trading. Small bounces have followed other similar hammer patterns in recent months.


The S&P 500 (SPY) breaks support at its 20DMA, but the index manages to bounce of a lower-Bollinger Band (BB)

The S&P 500 (SPY) breaks support at its 20DMA, but the index manages to bounce of a lower-Bollinger Band (BB)


The NASDAQ (QQQ) also bounced, but the tech-laden index sits in a much more precarious position than the S&P 500. If T2108 breaks overbought territory, I will first target tech stocks for more bearish trading strategies because such bearishness will likely find confirmation of the current 200DMA and 50DMA breakdowns.


The NASDAQ broke 200DMA support on Thursday (4/28) and followed that up with an even more ominous 50DMA breakdown. Buying off the lows did not manage to avert the breakdown.

The NASDAQ broke 200DMA support on Thursday (4/28) and followed that up with an even more ominous 50DMA breakdown. Buying off the lows did not manage to avert the breakdown.


The volatility index came to life again with the selling. Today, the VIX soared all the way through the 15.35 pivot point before fading back to 15.70. This move confirms sellers are getting restless. I countered with a small purchase of shares in ProShares Short VIX Short-Term Futures (SVXY) and put options in ProShares Ultra VIX Short-Term Futures (UVXY) in anticipation of the first day of trading in May. The first trading day of the month tends to deliver gains, particularly following strong bouts of selling. For example, since the bounce from oversold conditions in October, the first trading day of the month has delivered gains 5 of 7 months. The two months that started with selling were January and February. Needless to say, if May manages to start with selling, the bearish scenario I discussed above will trigger.


Volatility comes alive as sellers get antsy.

Volatility comes alive as sellers get antsy.


Finally, as if we need any more ominous charts, the Australian dollar (FXA) versus the Japanese yen (FXY) ended at its lowest close during this overbought period. This is close is yet another close call. A few more “inches” lower, and AUD/JPY will add a LOT more weight to the bear case.


AUD/JPY completely plunged over the past week - a very ominous sign.

AUD/JPY completely plunged over the past week – a very ominous sign.


— – —

For readers interested in reviewing my trading rules for an oversold 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).

(Reload page and/or click on the image, if it is not correct. At time of writing, server is having cache issues)


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 SVXY, long UVXY put options

Apr
28

Markets Brace for Another Australian Rate Cut

written by Dr. Duru
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The disappointing inflation numbers for Australia did not just take down the Australian dollar (FXA). Financial markets also rushed to ramp up the odds of a rate cut in the next policy meeting for the Reserve Bank of Australia (RBA).


The likelihood of a rate cut in the RBA's May meeting has suddenly soared above 50%.

The likelihood of a rate cut in the RBA’s May meeting has suddenly soared above 50%.


Source: ASX RBA Rate Indicator

Even if the RBA takes a pass on a rate cut in May, futures markets are still pricing in a rate cut as early as July or August (pdf). The drop in the Australian dollar and the increased odds of a rate cut likely go hand-in-hand.

Against the U.S. dollar, the Aussie has found some support at the rising 50-day moving average (DMA). However, more importantly for larger market implications, the Aussie is still tumbling hard against the Japanese yen. The change in trading in GBP/AUD is made all the more dramatic by the recent change in trading behavior on the British pound (much more bullish!)


Can the rising 50DMA on AUD/USD sustain support for a suddenly weakened Australian dollar?

Can the rising 50DMA on AUD/USD sustain support for a suddenly weakened Australian dollar?

AUD/JPY is getting dangerously close to confirming a major technical breakdown from its 50DMA and 200DMA resistance.

AUD/JPY is getting dangerously close to confirming a major technical breakdown from its 50DMA and 200DMA resistance.

GBP/AUD has been the gift that kept giving (downtrend) - is the gravy train over?

GBP/AUD has been the gift that kept giving (downtrend) – is the gravy train over?


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: long EUR/AUD, short GBP/AUD, short AUD/JPY

Apr
27

T2108 Update (April 27, 2016) – The Market’s Underlying Strength Continues to Expand Despite Tech’s Struggles

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: 81.4%
T2107 Status: 62.8% (highest since September, 2014)
VIX Status: 13.8
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #53 over 20%, Day #52 over 30%, Day #49 over 40%, Day #46 over 50%, Day #42 over 60%, Day #41 over 70% (overbought), Day #11 over 80%

Commentary
T2107, the percentage of stocks trading above their respective 200-day moving averages (DMAs), continues to expand and show off the underlying strength of the stock market. This technical indicator is at heights last seen in September, 2014.


More and more stocks continue to achieve the critical milestone of breaking out above their 200DMA trend lines

More and more stocks continue to achieve the critical milestone of breaking out above their 200DMA trend lines


This expansion for T2107 is happening even as the S&P 500 (SPY) has stalled out over the past week. The NASDAQ (QQQ) has even traded DOWN over this time period as several marquee big cap tech stocks have sold off. The apparent divergence between T2107 and the major indices is bullish – it indicates a breadth of participation.


The S&P 500 has stalled just under the high from November, 2015 that presaged the last sell-off. However, the index appears to be creating a subtle launching pad for the next run.

The S&P 500 has stalled just under the high from November, 2015 that presaged the last sell-off. However, the index appears to be creating a subtle launching pad for the next run.

The NASDAQ is wilting but the 200DMA and then the rising 50DMA look ready to provide support.

The NASDAQ is wilting but the 200DMA and then the rising 50DMA look ready to provide support.


T2108 closed at 81.4%. While it is still off its high for the extended overbought period, my favorite technical indicator has increased 3 of the last 4 days. As I have said through most of this overbought period, T2108 above 80% is less relevant than T2107 which still has room to expand.

The volatility index has not signaled much as it continues to churn under the 15.35 pivot. Volatility never increased enough ahead of today’s Federal Reserve statement on monetary policy to trigger a trade to fade volatility. However, Apple’s gap down did help run-up volatility from the open until the Fed. More on Apple later.


The volatility index, the VIX, is wandering aimlessly...

The volatility index, the VIX, is wandering aimlessly…


Speaking of central banks, the market’s reaction to the Bank of Japan’s (BoJ) statement on monetary policy throws an interesting twist on the outlook. The BoJ failed to provide more stimulus and traders immediately rushed right back into the Japanese yen (FXY). I discussed my opinions on the yen in “Forex Critical: Trader Confidence Continues to Grow.” I used the yen’s surge to close out my short on the Australian dollar (FXA) versus the yen. AUD/JPY is right back to bearish territory even as the stock market looks fine. I will not worry about any implications for the latest breakdown in AUD/JPY until/unless it breaks below April’s low.


Another fake 200DMA breakout for AUD/JPY

Another fake 200DMA breakout for AUD/JPY


In trading this week, I took profits on my put options on Netflix (NFLX). I executed a similar post-earnings trade on Google (GOOG) playing off a 50DMA breakdown. However, GOOG has the advantage of 200DMA support. It held like a champ today. I decided to hold since my put spread expires next week.


Google (GOOG) gets support from its 200DMA after an ominous post-earnings 50DMA breakdown

Google (GOOG) gets support from its 200DMA after an ominous post-earnings 50DMA breakdown


The stock continues to confirm its post-earnings 50DMA breakdown. I continued to accumulated call options in iShares MSCI Emerging Markets (EEM) in a change of strategy from my typical hedged approach. The pay-off may finally be coming as EEM bounced off support at its 20DMA.


The iShares MSCI Emerging Markets (EEM) is bouncing again in the middle of a choppy uptrend from January lows.

The iShares MSCI Emerging Markets (EEM) is bouncing again in the middle of a choppy uptrend from January lows.


The big kahuna of the day was of course Apple (AAPL).

I wrote about my pre-earnings trade for AAPL in “Betting On Apple Earnings As the Stock Struggles to Hold Support.” Although I went into earnings bullish, the trade configuration ended up with profits on the puts that paid for the complete loss on the call spread. Apple’s gap down of around 8% and closing loss of 6.3% was truly epic for recent post-earnings history. Since 2007 and excluding today, AAPL was a healthy 7 up and 2 down for April earnings. Only 4 other post-earnings reactions since 2007 produced losses of 6% or greater. So, given the extreme nature of the after-market response, it made sense that market makers gapped AAPL down at the open as far as possible.

The chart below shows that buyers took over almost right from the open. AAPL had gapped down far below its lower-Bollinger Band (BB) which set up a reversal from over-extended trading conditions. This setup is one of my favorite reversal trades. I abstained from trying the trade because I could not make the mental switch fast enough from selling the puts to buying more AAPL on the long side.


Apple (AAPL) suffered a disastrous 50DMA breakdown. Can the $50B extension of the buyback program revive the stock enough to regain investor interest?

Apple (AAPL) suffered a disastrous 50DMA breakdown. Can the $50B extension of the buyback program revive the stock enough to regain investor interest?


Going forward, AAPL is an even MORE interesting trade. Apple expanded the existing buyback program by $50B to a whopping grand total of $250B to be spent by the end of March, 2018. I assume this means AAPL will aggressively buy into this dip. I will trigger my next buy only after AAPL makes a new post-earnings high; presumably, such a milestone will demonstrate buying power. Even if AAPL breaks to a new post-earnings low from here, I will not go short: 1) the stock will become even more over-extended, 2) I am guessing such a continuation of selling will encourage AAPL to get particularly aggressive in its buying. Stay tuned!


This 15-minute chart of AAPL demonstrates the importance of a new post-earnings high. Buyers quickly set the high within 15-minutes of the open and a subsequent rally failed to break that resistance.

This 15-minute chart of AAPL demonstrates the importance of a new post-earnings high. Buyers quickly set the high within 15-minutes of the open and a subsequent rally failed to break that resistance.


No charts for these last trade updates:

  • Disney (DIS) broke 200DMA resistance and became the latest stock to push T2107 higher.
  • Alcoa (AA) gained 6.1% for a new post-earnings high that further confirms a bullish post-earnings push. I somehow missed buying the first post-earnings dip last week.
  • U.S. Steel (X) recovered from a post-earnings gap down and retest of the 2009 intrady low to finish flat. X is a buy again on a new post-earnings high.
  • THe run-up in Helix Energy Solutions Group (HLX) continues and has easily confirmed the 200DMA breakout

— – —

For readers interested in reviewing my trading rules for an oversold 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).

(Reload page and/or click on the image, if it is not correct. At time of writing, server is having cache issues)


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 DIS call options, long EEM call options, long GOOG put spread, long HLX shares

Apr
26

Australian Dollar Slammed By Inflation Data

written by Dr. Duru
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In the last edition of “Forex Critical” I claimed that the Australian is not likely to maintain its current blistering pace of gains. Just three days later, the stubbornly persistent rally of the Australian dollar (FXA) may already be grinding to a halt.

The Australian Bureau of Statistics (ABS) released its inflation data for March, 2016. I would not have considered the report particularly remarkable without the out-sized reaction in currency markets.


The Australian dollar (FXA) plunges following the March inflation report

The Australian dollar (FXA) plunges following the March inflation report

The Australian dollar may have finally peaked thanks to a disappointing inflation report.

The Australian dollar may have finally peaked thanks to a disappointing inflation report.


Source: FreeStockCharts.com

Inflation in Australia actually fell 0.2% quarter-over-quarter in March. The December quarter delivered a 0.4% quarterly rise. March moved the annual trailing inflation rate from 1.7% to 1.3%, now well off the Reserve Bank of Australia’s 2% target.

The leading drag on inflation came from fuel prices: the 10% price drop in automotive fuel, the third quarterly drop, drove transportation prices down 2.5%. Much more worrisome perhaps was the 1% drop for recreation and culture which includes domestic and international holiday travel and accommodation. The report did not mention a driver, but I assume this weak pricing implies weakened demand in this sector. Perhaps the strong Australian dollar had something to do with the performance: Australians choosing to travel abroad to take advantage of their stronger currency and international visitors choosing to stay away from the relatively high prices.


Clothing and footwear and transport  dragged on inflation while education costs soared.

Clothing and footwear and transport dragged on inflation while education costs soared.


Source: Australia Bureau of Statistics (ABS)

The rise in the Australian dollar and commodities had at least one prominent economist starting to dream about rate hikes in the near future.



These calls are clearly VERY premature, especially since the RBA policy statements continue to signal that the central bank stands ready to cut rates if necessary. The RBA has not even come close to hinting about the otential for rate hikes. These inflation numbers could be the trigger for at least more direct dovish talk from the RBA. Indeed, the thinking is already turning as quickly as the Australian dollar…


Be careful out there!

Full disclosure: net short the Australian dollar

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