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

T2108 Update (July 23, 2014) – Post-Earnings Special for Apple, Intuitive Surgical, and Whirpool

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 posted on twitter using the #120trade hashtag)

T2108 Status: 54.80%
VIX Status: 11.5
General (Short-term) Trading Call: Bullish bias now. Aggressive traders with shorts on the S&P 500 should be stopped out. Bulls continue holding. Bear/bull line remains at 1962.
Active T2108 periods: Day #263 over 20%, Day #115 over 40%, Day #4 over 50% (overperiod), Day #10 under 60% (underperiod), Day #13 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
The S&P 500 (SPY) closed at a fresh (marginal) all-time high. T2108 trickled higher to 54.8%. The VIX, the volatility index, moved lower and is ever lower to completely reversing last Thursday’s monster surge in volatility. If it were not for the all-time high, this day would be unremarkable from a technical trading perspective.

For today’s T2108 Update, I am skipping straight to three stock reviews: Apple (AAPL), Intuitive Surgical (ISRG), and Whirlpool (WHR). All three stocks experienced notable post-earnings reactions that provide good trading lessons.

Apple (AAPL)
I covered the pre-earnings trade for AAPL in “The Apple Pre-Earnings Trade: July, 2014 Edition” and a quick follow-up in the last T2108 Update. I went to sleep thinking that I would have a chance to load up on call options at a steep discount based on AAPL trading down 0.5% or so in after hours. I was quite surprised to find the situation reversed in the morning with AAPL even gapping up slightly. With the stock closing the day at $97.19, up 2.6%, anyone who followed the original trading plan of a $95/96 call spread did very well with a rough doubling in value – as targeted. If only AAPL had traded DOWN ahead of earnings, I too would have been right there with you!


AAPL earnings propel the stock to a fresh 52-week high and a fresh resumption of it suptrend

AAPL earnings propel the stock to a fresh 52-week high and a fresh resumption of it suptrend


I did stay committed to the plan to get long post-earnings even with AAPL opening to the upside. I bought call options right after the open. Options across the board were all down significantly as the implied volatility premium evaporated quickly (and market makers celebrated). Whether up or down, AAPL’s small price move validated my assessment to play the pre-earnings trade conservatively with spreads. Even as the stock started higher, my call options first LOST value as the pre-earnings premium continued to seep away. I was of course dismayed, but at some point the tide turned and the options gained with the stock. (A limit order to double down on my position was never filled). I promptly sold when the value of the call options nearly doubled: quick doubles in options trading almost always get sold just on principle. I also consider myself fortunate to generate the same return as if I had followed the original plan.

Anticipating a typical Friday letdown I bought a small number of put options, but I think I was too early.

I listened to the earnings conference call and only heard one small thing that worried me slightly. It seems that the momentum in iPads has notably slowed and the prospects are lukewarm. Here is a quote from Seeking Alpha transcripts:

“iPad sales met our expectations but we realized they didn’t meet many of yours. Our sales were gated in-part by a reduction in channel inventory and in-part by market softness in certain parts of the world. For example IDC’s latest estimate indicates a 5% overall decline in the U.S. tablet market, as well as a decline in the Western European tablet market in the June quarter.

But what’s most important to us is that customers are enjoying their iPads and using them heavily. In a survey conducted in May by ChangeWave, iPad Air registered a 98% customer satisfaction rate, while iPad Mini with retina display received an astonishing 100% customer satisfaction rate. The survey also found that among people planning to purchase a tablet within 90 days, 63% plan to buy an iPad and our own data indicates that more than half of customers purchasing an iPad are buying their very first iPad.

Another recent study by Custora found that iPad accounts for 80% of all U.S. tablet based e-commerce purchases. We’re very bullish about the future of the tablet market and we’re confident that we can continue to bring significant innovation to this category through hardware, software and services. We think our partnership with IBM, providing a new generation of mobile enterprise applications, designed with iPad’s legendary ease of use and backed by IBM’s cloud services and data analytics will be one such catalyst for future iPad growth.”

First, I was surprised to hear Cook acknowledge that results did not meet analyst expectations. If they met company expectations, he should not really care about analyst expectations. The commentary on iPads gets a little stranger when Cook says that the most important thing is that customers enjoy their iPas and use them a lot. This sounds like a subtle nod to a soft upgrade cycle for iPads. Softness in consumer upgrades sure puts the IBM deal in a fresher light. It is certainly no accident that Cook ended his commentary connecting the iPad’s promise to the enterprise vistas opened wider with the IBM partnership.

Cook let slip another interesting point that I believe is new. It has become standard in earnings conference calls for Cook and team to brag about AAPL’s broad reach across companies in the Fortune and Global 500. However, THIS time Cook noted that the penetration rate into these companies is very low:

“We also are in the — virtually all Fortune 500 companies, we are in 99% of them to be exact and 93% of the Global 500. However, when we dig into the business market deeper, though our market share in the U.S., in the commercial sector is good at 76% — this is according to IDC; the penetration in business is low. It’s only 20%. And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%.”

It seems to me that the penetration rates are just as important, if not more so, than the reach. Cook of course twists this low penetration into an opportunity given all the notebooks that can be cannibalized. Again, the IBM deal makes even MORE sense knowing the poor penetration rate.

Intuitive Surgical (ISRG)
I tried and tried to get long ISRG ahead of earnings but the spreads on the options were just too wide, and I was too cheap. I liked the stock’s stabilization at the 50DMA ahead of earnings. Given my bullish bias on the stock (as explained in earlier posts), I was inclined to give this trading action a positive interpretation.

ISRG did not report anything stellar, it just was not more bad news. Still, I was blown away by the 50 point, 13% gap up at the open. This action immediately put me on watch for a shorting opportunity to bet that such an extension above the upper-Bollinger Band (BB) would get faded as is usually the case, even post-earnings. However, after seeing ISRG’s continued strength in earlier over-extension episodes (see chart below), I decided to stay put. My bullish bias was the clincher in preventing me from making a regret-filled move: ISRG continued higher for 20 MORE points! The lessons here are never get over-confident about a technical trading pattern and always watch for confirmation/contradiction in the historical record for an individual stock.


Intuitive Surgical soars post-earnings but remains below the April 1st open on new product news

Intuitive Surgical soars post-earnings but remains below the April 1st open on new product news


Whirlpool (WHR)
WHR finally printed a stinker for its earnings report. The company guided down:

“Whirlpool Corporation has adjusted its full-year 2014 guidance to reflect trade customer inventory transitions in China related to the pending acquisition of a majority stake in Hefei Rongshida Sanyo Electric Co., Ltd. and investment expenses related to the pending acquisition of a majority stake in Indesit Company S.p.A. The company expects full-year net earnings per diluted share of $10.30 to $10.80 and full-year ongoing business earnings per diluted share of $11.50 to $12.00.”

Previous guidance was for FY14 EPS of $12.00 to $12.50. The stock gapped down abut 3%, and I braced for a fresh downward plunge on the fresh breakdown below 50DMA resistance. I practically fell out my chair when I saw how the stock closed. A sharp reversal for a GAIN of 1.4%. The stock was stopped cold just under its 200DMA. A close above that resistance would be a very bullish signal.


Post-earnings Whirpool prints a strong reversal pattern that typically marks a lasting bottom. Just a 200DMA separating the stock from a fresh bullish run

Post-earnings Whirpool prints a strong reversal pattern that typically marks a lasting bottom. Just a 200DMA separating the stock from a fresh bullish run


Earnings season so far has produced some good results and healthy stock reactions. The sporadic jitters going into earnings have almost all faded away. Traders should assume net-net that the market is back to looking for reasons to buy earnings stories, not sell them.

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 AAPL puts

Jul
23

T2108 Update (July 22, 2014) – S&P 500 Presses Against All-Time Highs And Bottoming Volatility (Includes Chart Reviews And Addendum for Apple Pre-Earnings Trade)

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 posted on twitter using the #120trade hashtag)

T2108 Status: 53.0%
VIX Status: 12.2
General (Short-term) Trading Call: Hold. See below.
Active T2108 periods: Day #262 over 20%, Day #114 over 40%, Day #3 over 50% (overperiod), Day #9 under 60% (underperiod), Day #12 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
The S&P 500 (SPY) pushed higher to a new (marginal) intra-day all-time high but failed to hold for a fresh all-time closing high. Regardless, the index confirmed it wants to maintain the bullish trend and critical support I pointed out in the last T2108 Update.


The S&P 500 keeps its head up

The S&P 500 keeps its head up


At these levels the index is once again working on the rare feat of entering the next overbought period at a HIGHER level than the last overbought period. T2108 closed at 53.0%, implying the market has plenty of upside potential for the next phase of trading (overbought triggers at 70%). Aggressive traders who still have shorts on the index should stop out after/if the S&P 500 closes at a fresh all-time high (the on-going churn is the price to pay for being aggressive).

On the flip side, the VIX, the volatility index, is showing more hints of bottoming. I have been watching it ever more closely since last Thursday’s monster surge. Volatility faded as expected, but today I detected potential confirmation of a bottom as the 50DMA has held as support on the third post-surge day. Ever so slowly, the 50DMA is transforming from a downtrending cap on volatility to support.


Volatility continues to look like it is finally bottoming

Volatility continues to look like it is finally bottoming


This observation motivated me to close out my put options on ProShares Ultra VIX Short-Term Futures (UVXY). Ironically, while I nailed the fade with a first tranche of puts at the high of UVXY on Thursday, the subsequent fade barely increased the value of the put. I braced myself for a reversal and sure enough Monday delivered. I stuck to plan and added another tranche of puts. Tuesday’s fresh decline got me impatiently anticipating a fresh swoosh lower. After a big swoon failed to materialize, I hurriedly closed out the position to preserve profits. The chart on UVXY is behaving a bit differently than earlier rendezvous with fresh all-time lows: it has built a small base for almost three weeks at its all-time low. UVXY is acting like it actually wants to put on a show up and to the right….


Is UVXY trying to bottom along with volatility?

Is UVXY trying to bottom along with volatility?


The implications of increasing volatility are many. While the S&P 500 can certainly continue increasing while the VIX trickles upward, we should expect the index to trade down at any moment volatility erupts to the upside. Volatility is so low now that the market implies there is little chance of a 10% correction (according to the Bank of England):


Complacency in a chart...

Complacency in a chart…


Notice how the odds of a big correction bottomed out 2 or 3 years before the big one finally hit.

The next two charts give homage to a potential bottom in volatility as they feature likely tops.

Acuity Brands, Inc. (AYI) is a cyclical company that provides lighting solutions mainly to commercial real estate. The stock broke down for a major post-earnings loss on July 1st. The trickle of selling since then has confirmed an important breakdown below the 200DMA. A gap fill should be around the corner for the next major test. A break below this support would be a major bearish event. Even if the stock rallies from here instead, it should meet stiff overhead resistance at the 50 and 200DMAs as a double-top now looms heavy on this stock.


Acuity Brands, Inc. (AYI) breaks down and confirms a likely double top

Acuity Brands, Inc. (AYI) breaks down and confirms a likely double top


Michael Kors Holdings Limited (KORS) recently gave way under the weight of a slew of downgrades. The stock was already struggling to hold on after two breaks below 50DMA support. A high-volume plunge below the 200DMA flashed a major warning signal. Sure enough, the downgrades came the next day among a lot of downside fireworks. The stock plunged one more time the next day on a big gap down. As we observe so often, a stock rarely holds far below its lower-Bollinger Band for long. KORS snapped back like a rubberband and has churned ever since.


Looks like a top is in for Michael Kors Holdings Limited (KORS)

Looks like a top is in for Michael Kors Holdings Limited (KORS)


Now let’s swing over to a stock that might be bottoming after a series of under-performing months: Oaktree Capital Group, LLC (OAK). I have been eyeing this stock for a new buy point for a long time. Here is the description from Yahoo! Finance:

“Oaktree Capital Group, LLC operates as a global investment management firm that focuses on alternative markets. It manage investments in a number of strategies within six asset classes, including distressed debt; corporate debt, including high yield debt and senior loans; control investing; convertible securities; real estate; and listed equities. The company pursues these strategies through closed-end, open-end, and evergreen funds. Oaktree Capital Group, LLC was founded in 1995 and is headquartered in Los Angeles, California.”

With a 7.8% yield now, the stock is looking pretty juicy for a fresh purchase. It is of course the kind of “reach for yield” that has central banks across the globe increasingly complaining even as it is essentially their low-rate policies that both motivate and enable the reaching. OAK is full of special investments that are attractive in a low-rate environment. For example, the WSJ recently reported that OAK may be joining forces with Blackstone (BX) to purchase $8.84B in Spanish loans. (gulp!)

From a technical standpoint, OAK hit two important milestones. First, on July 8th it printed a hammer on high-volume. The buying off the lows continued and confirmed the bottom. This week buying volume picked up again to push OAK over pesky and persistent 50DMA resistance. This combination makes a very convincing case for a bottom.


Oaktree Capital Group, LLC (OAK) may have finally hit rock bottom

Oaktree Capital Group, LLC (OAK) may have finally hit rock bottom


I conclude the chart reviews with a bullish chart that I promised to brich2day on StockTwits. This user wanted to understand my commentary on the post-earnings outburst on Crocs (CROX).


My attempt at explaining my amazement with the outburst from Crocs (CROX)

My attempt at explaining my amazement with the outburst from Crocs (CROX)


The chart below shows the neat consolidating channel that no longer has CROX trapped. Regular readers know I pointed out CROX as a buy after it surged to end 2013. Regular readers should also know that it is typically good to stay patient after such extensions well past an upper or lower Bollinger Band. Hard to believe I had to wait THIS long for the pay-off after I neatly entered a position as the 200DMA got tested. I promptly took profits with the stock so far above its upper-Bollinger Band (again, standard practice). I will be looking for another post-breakout fade for the next buying point.


An outburst from CROX...finally.

An outburst from CROX…finally.


Finally, a quick follow-up to the July pre-earnings trade for Apple (AAPL). I neglected to point out that IF AAPL closed for a gain ahead of earnings then the bullish signal would get muddied. I decided to respond to the move higher by putting in TWO orders, one for a call spread and another for a put spread. Neither triggered as the market refused to give me a good entry price (I really wanted to go long).


Sure enough, AAPL made a decent gain of 0.8% going into earnings. It dropped 0.5% in after-hours trading post-earnings. Essentially, the stock is fading the pre-earnings gains. As I stated in the earnings trading plan, I am firmly focused on buying a post-earnings dip (before switching back to using the Apple Trading Model). AAPL’s earnings were fine and did not change the fundamental bullish trading (or investing) thesis.

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 OAK

Jul
21

The Apple Pre-Earnings Trade: July, 2014 Edition

written by Dr. Duru
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It is earnings time for Apple (AAPL). Expectations are undoubtedly high after April’s huge post-earnings surge – the 8.2% one-day gain is, since 2007, second only to the 8.9% gain in April, 2012. The subsequent run-up certainly has me thinking AAPL has confirmed my expectations for eventual all-time highs. It is now time to temper expectations a bit, but the technicals and history are still on the side for another post-earnings gain. I was not able to update the Apple pre-earnings analysis ahead of April earnings, but hopefully regular readers were able to get what they needed from previous posts to know to go bullish in April.

First, a reminder that since 2007, AAPL tends to deliver a gain the day after reporting earnings: 18 of 30 (60%) of earnings have done so. However, only TWO of the last 8 earnings announcements have delivered positive gains. AAPL’s earnings “mettle” has clearly become tarnished.


Number of Positive Versus Negative One-Day Reactions to Apple's Earnings By Month of the Year (Since 2007)

Number of Positive Versus Negative One-Day Reactions to Apple’s Earnings By Month of the Year (Since 2007)


Note the strong bullishness of April earnings reports. I was fortunate enough to start this analysis before the April, 2012 earnings, and it gave me the confidence to continue this analysis. July is second to April in bullishness. The other two earnings seasons are actually net bearish.

The distribution of post-earnings gains shows some real promise if a trader nails the direction correctly. However, despite the bullish bias in AAPL’s post-earnings behavior, the distribution skews toward large downside potential with a median price change of 2.5% while the average is only 1.0%. In other words, WHEN AAPL screws up, it tends to do so in a big way.


Distribution of One-Day Price Changes After Apple Reports Earnings (Jan, 2007 to Apr, 2014)

Distribution of One-Day Price Changes After Apple Reports Earnings (Jan, 2007 to Apr, 2014)


The most interesting correlations are those where actual trading provides indicators for future trading. In AAPL’s case, April is unfortunately the only earnings month where very clear and strong relationships exist. April has a strong inverse correlation between AAPL’s price change at the close before earnings and AAPL’s price change the day after earnings. Sure enough, this past April, AAPL traded down 1.3% just ahead of earnings – a notable move when the average change is only 0.1% and the median is 0.7%.

Click for a larger view…


Correlation of Apple's Various Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change Sorted By the Month of Earnings

Correlation of Apple’s Various Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change Sorted By the Month of Earnings


Removing the segmentation by earnings month, there is an increasingly strong (inverse) correlation between the price change at the close before earnings and the post-earnings 1-day price change. The last 4 earnings have delivered a nearly perfectly inversely correlated relationship. The last 4 earnings also stand out for a strong inverse relationship between the average price change in the 14-days prior to earnings and the post-earnings price change.

Click for a larger view…


Correlation of Apple's Various Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change

Correlation of Apple’s Various Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change


Here are charts showing the time series of the average daily price changes for 7 and 14 days prior to earnings. As of Friday, July 18, AAPL was down an average 0.3% for the past 7 days and down an average 0.1% for the past 14 days. AAPL finished down 0.5% on Monday, thus nearly guaranteeing negative averages going into the close on July 22nd ahead of earnings – and adding a slight tip to the bulls for the day after earnings.

Click for a larger view…


Apple's Average Daily Price Change During the Weeks Prior to Earnings Since 2007

Apple’s Average Daily Price Change During the Weeks Prior to Earnings Since 2007

AAPL has churned with a slight downward bias going into July earnings as 2014's rally stalls

AAPL has churned with a slight downward bias going into July earnings as 2014′s rally stalls


Source for graph: FreeStockCharts.com

So how to play the slight bullish bias? If you are only an investor, there is nothing to do except to sit back and watch the cows come home. :) If you want to trade the post-earnings reaction, I recommend just conservative plays. I prefer call options. The market has already priced in about a 3% gain post-earnings for the call options expiring on Friday, so the bar is very high for making any money. A bullish call spread is the most effective way around these excessive premiums. If a trader targets a conservative 2% gain from Monday’s $94 close, this gives a $95.88 target. The $95/$96 call option costs about $0.40/per spread. So, this leave an opportunity to roughly double your money assuming an expiration at $95.80 or above. There are of course many potential configurations to suit your trading style and risk tolerance.

Another interesting play is to WAIT until after earnings. Assuming AAPL’s July earnings do not hurt the fundamental upward and bullish bias, any post-earnings dip is buyable. After earnings, I will return to playing the Apple Trading Model (ATM). I have updated the regression (decision) trees through Friday, July 18. You can access the links and an additional explanation in this article: “Apple Trading Model – Preparing for A Potential Change In Trading Patterns.” If AAPL sells off after July earnings, I will update an old analysis showing likely times to expect a post-earnings bottom for AAPL.

I am always interesting in hearing feedback on these modeling exercises. Good luck to all!

Be careful out there!

Full disclosure: long AAPL call option (note this is leftover from a failed play for a typical Monday pop in AAPL)

Jul
19

T2108 Update (July 18, 2014) – S&P 500 Snap Back Preserves Important Bullish Trend and Support

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 posted on twitter using the #120trade hashtag)

T2108 Status: 51.3%
VIX Status: 12.1 (a 17.1% drop!)
General (Short-term) Trading Call: Hold. See below.
Active T2108 periods: Day #260 over 20%, Day #112 over 40%, Day #1 over 50% (overperiod), Day #7 under 60% (underperiod), Day #10 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
In the last T2108 Update, I managed to say all the right things to characterize the technical picture and the risks for bears and bulls. However, I managed to miss perhaps the most important signal which was what the forex (currency exchange) market was saying about Thursday’s sudden sell-off.

In “Forex Mainly Yawns As Stock Market Volatility Finally Surges Off Lows” I pointed out how the typical risk/fear plays did not manifest in the forex market in reaction to or in response to Thursday’s selling. Most importantly, AUD/JPY, the Australian dollar (FXA) and Japanese yen (FXY) currency pair, bounced back quickly before the U.S. market closed on Thursday. Well before it opened again, AUD/JPY had already started to trade HIGHER. The bottom-line was that Thursday’s selling did not have sufficient conditions for me to switch the trading call to an outright bearish one. Indeed, the snap back on Friday was almost as swift and vicious as Thursday’s plunge.


The S&P 500 snaps back

The S&P 500 snaps back


T2108 also surged nearly reversing all of Thursday’s losses. It closed the day at 51.3%. I was actually a bit disappointed the market did not deliver a gap down on Friday because it would have created clear quasi oversold conditions which would have finally triggered my purchase of call options on ProShares Ultra S&P500 (SSO).

The most important development for T2108 is that the pattern of higher lows from last year’s oversold conditions remains intact. This creates a VERY bullish case for aggressive traders to, yes (sorry!), churn again to look for opportunities to go long the S&P 500 (SPY). My choice for now remains to fade volatility, and I held onto my put options on ProShares Ultra VIX Short-Term Futures (UVXY).

I switched the trading call to hold to basically say that whether you are bearish or bullish, you have enough reasons to hold onto your positions if you did not already get stopped out: bears should stop out at fresh all-time highs (but likely will not given what the commentary I see from various bulls), bulls should stop out if Thursday’s lows get breached. In both cases, these triggers are for risk management (of losses). The risks of churn remain high although I think we are close to a new sustained trend, perhaps after the coming week of earnings.

The volatility index, the VIX, is the biggest source of caution for the bulls. While I think it will continue to fade this coming week, Thursday’s surge could very well FINALLY mark a bottom for the VIX. The S&P 500 can of course continue higher at higher levels of volatility, but higher volatility will likely mean buying dips rather than breakouts will remain the preferred way to get long. I may make ONE exception at the moment T2108 re-enters overbought territory.


The VIX plunges...and confirms resistance at the 15.3 pivot

The VIX plunges…and confirms resistance at the 15.3 pivot


I had a VERY interesting exchange on Saturday (July 19, 2014) on twitter with master “old school” technical trader Helene Meisler. She noted the impressive surge in breadth on the NYSE on Friday while another trader corrected her on the timeframe for the last time breadth was this good. I noted that when breadth was last this good it occurred during a time when it looked like the market was finally topping (I even went so far as to call a market top later that month!). Meisler made the excellent point that this time is different because of the sell-off in small-caps. In other words, the strong breadth this time around is not likely a blow-off of the last eager buyers; it is instead likely the eager rush of “bargain shoppers” stepping into the breach left by sellers.


A strong surge in NYSE breadth may indicate the beginning of a fresh rally for stocks

A strong surge in NYSE breadth may indicate the beginning of a fresh rally for stocks


Source: Twitter

Contrast this observation to a bearish thesis grasping for a reason to stay bearish.


I will not go into the overall context since Kass churned rapidly in and out of his positioning through the rapid events. Just note that the switch back to net short happened within the first few minutes of the U.S. open, before it was clear that breadth was so strong. From my perspective, using the technicals I described for Thursday, the sudden gap up was an early warning/confirmation that the market was already prepared to leave Thursday’s pessimism behind. My advice to aggressive (bearish) traders in the last T2108 Update was to go short preferably on a fade. The gap above the old bear/bull line of 1962 on the S&P 500 hopefully told you folks to be cautious and stay patient. I definitely understand if you chose to fade near the close – just stay on your toes and continue to consider all such trades to be very short-term for now. The only thing in your favor right now is that the S&P 500 did not manage to recover ALL its losses from Thursday.


This 15-minute look at intraday trading makes the latest 2-day episode look like another fake breakdown below the 1962 bear/bull line

This 15-minute look at intraday trading makes the latest 2-day episode look like another fake breakdown below the 1962 bear/bull line


Kass’s idea to take into consideration the impact of options expiration is a good one. However, to interpret it better, I would like to know whether traders were positioned very bullishly or bearishly going into Friday. Absent that info, Monday becomes a critical test for follow-through. Stay tuned…!

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 UVXY puts

Jul
17

T2108 Update (July 17, 2014) – A Bullish Trend Suddenly Hanging By A Thread

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 posted on twitter using the #120trade hashtag)

T2108 Status: 42.6%
VIX Status: 14.5 (a 32% increase!)
General (Short-term) Trading Call: Should be stopped out S&P 500 longs. Aggressive traders can go bearish for wing trades until/unless T2108 returns to overbought territory. See below.
Active T2108 periods: Day #259 over 20%, Day #111 over 40% (overperiod), Day #1 under 50% (underperiod), Day #9 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
The S&P 500 (SPY) quickly went from a whiplash for the bears to a true retreat for the bulls.


The primary uptrend for the S&P 500 ends with a decisive blow

The primary uptrend for the S&P 500 ends with a decisive blow


T2108 accompanied the market sell-off with a massive drop from 54.2% to 42.6%. The resulting -21.5% change in T2108 ranks #229 in size of NEGATIVE plunges since 1986. T2108 has had drops of similar magnitude on January 24 and February 3 of this year. So today’s action did not provide a sufficient signal that a sustained top is in the market. However, the close below the bear/bull line at 1962 on the S&P 500 qualifies to switch the trading call to bearish for the most aggressive traders (fades are of course ideal). Churn remains a huge risk, especially with earnings season in full swing, so bearish trades should be considered very short-term.

Another risk for bearish trades could be quasi-oversold conditions. These conditions occur after a 2-day decline of T2108 totaling at least 20%. Both days should feature “significant” declines (loose definition is on purpose). Typically, after such plunges, the S&P 500 experiences sharp reversals (upward). True oversold occurs when T2108 hits 20%, but we have not seen THOSE conditions in over a year! The 20% “overperiod” is now on day #259 and counting. T2108 will also be experiencing a critical test of the higher lows it has printed since oversold conditions in June. It is a bullish trend now suddenly hanging by a thread. I will consider a CLOSE below 39% on T2108 as a very bearish change in the fundamental underlying character of the market. That is, I will tend to “err” on the side of bearishness when signals are mixed.


The fundamentally bullish undertones of the market are "threatened" by the potential end of the higher lows on T2108 since 2013's oversold period

The fundamentally bullish undertones of the market are “threatened” by the potential end of the higher lows on T2108 since 2013′s oversold period


The ostensible explanations for the market’s down day rest on negative geo-political headlines from Gaza and Israel and the tragic crash of a Malaysian airline in Ukraine. No one will be able to explain why THESE headlines are more important than all the other negative headlines the market has essentially ignored recently. All we really know is that the market is bullish until it’s not. Or perhaps the Federal Reserve’s posturing this week on valuations is playing with people’s heads…

In the meantime, I faded ProShares Ultra VIX Short-Term Futures (UVXY) on principle: the VIX surged over 30%. Such a sudden and sharp intensification of fear does not last. The only question is how much higher it will go until it experiences the first fade. I will accumulate puts if the market serves them up at lower prices. Note that this trade does NOT come with a bullish or bearish call on the S&P 500. It is a call specifically on volatility that I think is more reliable than a directional bet on the S&P 500 here. The lower T2108 drops, the less sustainable such surges in volatility become. Stay tuned….


The VIX surges...and amazingly manages to stop cold at the old 15.35 pivot (you just can't make this stuff up!)

The VIX surges…and amazingly manages to stop cold at the old 15.35 pivot (you just can’t make this stuff up!)

UVXY interrupts its regularly scheduled downtrending programming....

UVXY interrupts its regularly scheduled downtrending programming….


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 UVXY puts

Jul
14

Some Chart Reviews Before Earnings Potentially Change Everything: RAX, MLNX, DBA, JJA, KBH, BBY, IBM, VLO

written by Dr. Duru
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Technical analysis becomes particularly precarious during earnings season, but there are some intriguing charts I felt compelled to post anyway. Some telling and strong stories here…

Rackspace Hosting, Inc. (RAX)
RAX has given back all its gains from the initial excitement over the potential for “strategic alternatives.” Bears have added insult to injury by rushing back into battle. Note that the open interest put/call ratio has also plunged to at least 2-year lows, so shorts are likely well-hedged…just in case.


RAX has almost returned all its gains from initial excitement over "strategic alternatives"

RAX has almost returned all its gains from initial excitement over “strategic alternatives”

Shorts have rushed back into RAX as potential for a deal diminshes

Shorts have rushed back into RAX as potential for a deal diminshes


Source: Schaeffer’s Investment Research

Mellanox Technologies, Ltd. (MLNX)
MLNX has struggled o build on the positive catalyst of insider buying. I remain bullish but missed this latest jump into 200DMA resistance. Once MLNX finally makes a higher high, I will get more bullish and much more aggressive in trading/buying the stock.


Mellanox Technologies struggles to build on positive catalyst of insider buying

Mellanox Technologies struggles to build on positive catalyst of insider buying


PowerShares DB Agriculture (DBA)
iPath DJ-UBS Agriculture TR Sub-Idx ETN (JJA)

What in the world is going on with agriculture stocks?!? The worst drought in California’s history is clearly not a concern across major ag-related indices. I really hope to have some time in coming weeks to study this closer. It is yet one more signal that casts doubt that inflation is a looming problem – even if food is not a core component of the inflation index.


Major breakdown in DBA

Major breakdown in DBA

JJA has been completely demolished

JJA has been completely demolished


KB Home (KBH)
I was soooo hopeful that the post-earnings excitement would finally be sustained. Instead, a fresh retest of support has greeted a strong fade of the initial post-earnings surge.


Same old story: good earnings news and a fade

Same old story: good earnings news and a fade


Best Buy Co., Inc. (BBY)
As I feared, the 200DMA served as stiff resistance for BBY. I have five more months to go on this call spread play. If the market turns its attention to Citigroup’s hike of its price target, then I should be golden. Still clinging to profits…


Best Buy fails the test

Best Buy fails the test


International Business Machines Corporation (IBM)
IBM has followed through with its 50DMA breakout after a short period of consolidation. This is very bullish. I need strong follow-through this week though!


IBM follows-through on its 50DMA breakout - very bullish

IBM follows-through on its 50DMA breakout – very bullish


Valero Energy Corporation (VLO)
I have kicked myself for a long time now for not participating in the recent run-up in refiner stocks. I was very bullish refiners back during the run-up at the end of the last bull market. I had promised myself to stay alert for an opportunity to buy back in. Neither a bottom or several breakouts later got me back in. Now, I just keep watching…


Valero faces a critical retest of 200DMA support as a negative news cycle settles in

Valero faces a critical retest of 200DMA support as a negative news cycle settles in


Full disclosure: long KBH, long BBY call spread, long IBM call spread

Jul
14

T2108 Update (July 14, 2014) – Bear Whiplash

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 posted on twitter using the #120trade hashtag)

T2108 Status: 56.6%
VIX Status: 12.6 (fades hard into the close)
General (Short-term) Trading Call: Hold. Stop for longs on the S&P 500 remains at 1962
Active T2108 periods: Day #254 over 20%, Day #106 over 40%, Day #33 over 60% (overperiod), Day #4 under 70% (underperiod)

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
Another shallow pullback, another bout of whiplash for over-eager bears. As I noted last week, despite the seemingly bearish tidings accompanying the tumble from overbought conditions, I was very hesitant to switch the trading call to a bearish one. The 1962 line in the sand I drew for the S&P 500 (SPY) worked out amazingly well. It prevented me from joining the bears in another case of whiplash….like this one.


I think this parable of “Big” is a fascinating one to watch. It is a classic attempt to call a top, one of the most difficult market-timing calls to make. I myself have switched to waiting for one of two distinct signals: a breakdown below critical support after falling from overbought conditions; or a major fade on high volume or from critical resistance during overbought conditions. The criteria Big has for going short appears to be that prices are too high and the stock market is over-valued. My guess is that this short was started as a quick-hit play to be closed on the next plunge. After all, Big has not convinced Doug Kass to go any further than a 10% short on QQQ:


(Note well: I am NOT picking on Kass. I have DEEP respect for him. I think he is one of the better perma-bears to follow because he is not stuck on ideology, doesn’t hate America, and avoids claims of apocalyptic doom, at least when he is not quoting or retweeting the true perma-bears at ZeroHedge. I just happen to disagree with his persistent and constant bearishness on the markets these oh so many months upon months. I cannot even remember when he last had a constructive view on the market.)

Anyway, T2108 surged today as high as 61.8% before falling back to 59.5%. The S&P 500 had a firm uptick that confirmed once again support at the 20DMA uptrend. The index is now poised to make another fresh all-time high. Earnings season is a huge caveat of course, but I find it telling that the pre-earnings jitters have already subsided in this way.


The S&P 500 confirms its 20DMA uptrend. Appears poised for fresh all-time highs.

The S&P 500 confirms its 20DMA uptrend. Appears poised for fresh all-time highs.


This fresh pop in the S&P 500 returned ProShares Ultra VIX Short-Term Futures (UVXY) to the bottom of last week’s gap up. Puts on UVXY were my preferred way to make a bullish play as I figured volatility was even more likely to sink again than the S&P 500 to pop in the short-term. The trade worked out well as I closed out those puts for a 50% gain.


Another failed surge by UVXY

Another failed surge by UVXY


What I did not realize at the time is that Federal Reserve Chair Janet Yellen is speaking to the U.S. Senate tomorrow (July 15th). Fed events have lately served to dampen volatility (Note well that I need to verify the prevalence with data one of these days; currently I have an informal correlation/relationship from casual observation). Perhaps traders decided to get a jump this time around.

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: no positions

Jul
13

The Federal Reserve’s Latest Policy Decision Frustrates Bears and Central Banks Alike

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on June 21, 2014. Click here to read the entire piece.)

“There is no mechanical formula.”

This is the response Federal Reserve Chair Janet Yellen gave to a reporter who tried to press her on the rules and timing for the first hike in interest rates. This was also the final statement in the press conference to the latest policy decision, and I think it sums up the entire event. Yet, despite the Federal Reserve staying on-message, some observers managed to get all twisted in disappointment, dismay, and even surprise. I claim that two camps in particular were likely frustrated with the Fed’s seeming refusal to talk directly about accelerating the presumed schedule for rate hikes (currently projected around the second half of 2015): stock market bears and several major central banks.

A Trigger Lying In Wait for Market Bears

{snip} Below, I post a chart I first produced last December to explain potentially why the market was all hot and bothered over tapering (see “A 1-Chart Explanation For The Market’s Obsession With Fed Tapering And Tightening“). The 4-week moving average of unemployment claims has just about reached the lows of all the economic cycles since the late 1970s. A rising rate environment at this point has pretty consistently preceded a recession just over the horizon.


A rising rate environment at the common lows of initial claims has typically closely preceded the next recession

A rising rate environment at the common lows of initial claims has typically closely preceded the next recession


Source: St. Louis Federal Reserve

In other words, bets against the stock market could bear a lot more fruit once the Fed finally indicates it is truly serious about hiking rates. A stock market at all-time highs and major lows in volatility strikes me as particularly vulnerable to talk of higher interest rates.

Antsy Central Bankers With Stubbornly Strong Currencies?

I am really stretching the speculation by claiming major central banks are also getting frustrated with the Federal Reserve, but I think the rationale deserves consideration.

{snip}


The British pound continues its relentless push higher against the U.S. dollar

The British pound continues its relentless push higher against the U.S. dollar


{snip}


The euro is slowly breaking down but may have reached a floor for now against the U.S. dollar

The euro is slowly breaking down but may have reached a floor for now against the U.S. dollar


{snip}

The Bank of Canada has consistently projected the U.S. as a beacon of economic strength for the global economy in 2014 while downgrading its outlook on the Canadian economy. Governor Stephen Poloz does not talk about purposely pressuring the Loonie (FXC), but his rhetoric has helped to weaken the currency and provide some much needed relief for Canadian exporters. His effectiveness is reflected in a recent Bloomberg article that pointed out:

{snip}

Poloz has a major challenge ahead with the double whammy of a non-cooperative Federal Reserve AND May consumer price index readings which came in unexpectedly high on Friday, June 20. {snip}


Increasingly, it seems the U.S. dollar has topped out against the Canadian dollar for this year

Increasingly, it seems the U.S. dollar has topped out against the Canadian dollar for this year


The most frustrated central bankers may be down in Australia where Governor Glenn Stevens and crew have regularly expressed their surprise that the Australian dollar (FXA) remains so high. {snip}


Has the Australian dollar finally topped out or is it just resting ahead of the next push higher?

Has the Australian dollar finally topped out or is it just resting ahead of the next push higher?


{snip}


The U.S. dollar continues to meander with no trend

The U.S. dollar continues to meander with no trend


Source for charts: FreeStockCharts.com

Another Over-Reaction to the Federal Reserve
So now I bring this full circle back to the Federal Reserve’s last decision on monetary policy. The reaction to this decision is indicative of a market groping for a catalyst that changes the balance of power in financial markets; something that provides some excitement (aka volatility) even. I was so surprised at all the hand-wringing over a “business as usual” policy statement that I rolled the tape on the press conference. Wondering what I missed, I actually listened to the conference call a second time (yes, it was painful). The experience made me even more convinced the market over-reacted just as much as it did when Yellen carelessly suggested rates might increase earlier than the late 2015 market projection.

{snip}

So, even as gold and silver surged the day after the Fed’s decision, I contained my excitement. I was even quite bemused and amused by the readiness of gold-haters {snip} to jump on that pop as confirmation that the Fed is indeed behind the curve. {snip}


Gold pops post-Fed but the most I can say so far is that 2013 is looking more and more like a major bottom

Gold pops post-Fed but the most I can say so far is that 2013 is looking more and more like a major bottom


{snip} While little has fundamentally changed for gold, silver is in even worse shape…


Silver is still struggling to lift off its recent lows

Silver is still struggling to lift off its recent lows


Source for charts: FreeStockCharts.com

{snip}

To me, the data do not support the notion that broad-based inflation is taking hold in the economy. We do not even have wage pressures, not to mention all the slack that remains in the economy as evidenced in part by extremely low levels of housing production. I will not even be surprised if late 2015 comes and goes without a single rate hike. Indeed, Yellen informed the crowd that there is a lot of uncertainty in monetary policy:

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on June 21, 2014. Click here to read the entire piece.)

Full disclosure: long GLD, SLV. In forex, I am long USD/CAD, net short the Australian dollar, net short the euro, net long the pound.

Jul
13

A June UK Manufacturing PMI Full of Superlatives Suggests Rate Hikes This Year

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on July 1, 2014. Click here to read the entire piece.)

The British pound (FXB) responded so strongly to the June Markit/CIPS UK Manufacturing PMI® report that I decided to read it and go beyond the headlines. I found a report full of superlatives that suggests to me, and apparently to financial markets in general, that the Bank of England (BoE) will indeed have to start hiking rates in 2014. The BoE cannot wait until next year per original forecasts. The Bank of England seems certain now to raise rates sooner than the market previously expected.


The British pound continues to soar, particularly against the U.S. dollar

The British pound continues to soar, particularly against the U.S. dollar


Source: FreeStockCharts.com

Here is a list of the superlatives from the June report (all direct quotes):
{snip}

I am remaining “non-bullish” on the pound. I think that once the first rate hike finally comes, the BoE will insist that a tightening cycle is not underway. Instead, the BoE will say the rate hikes are a simple acknowledgement of the sustainability of the burgeoning recovery. The BoE will try to communicate that it will stay careful not to allow rate hikes or expectations of rate hikes to squelch the recovery. This will extend to a currency that gets too strong. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on July 1, 2014. Click here to read the entire piece.)

Full disclosure: long the British pound

Jul
13

A Stubbornly Strong Australian Dollar Introduces A Risk Factor into Economic Forecasts

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on June 26, 2014. Click here to read the entire piece.)

Australia’s Bureau of Resources and Energy Economics (BREE) recently released its Resources and Energy quarterly for the June, 2014 quarter containing a notably more cautious tone toward the Australian dollar (FXA) and its interaction with commodity prices (particularly iron ore, Australia’s largest export). Specifically, the stubbornly strong Australian dollar has forced the BREE to hike its forecast of the currency’s exchange rate in subsequent years and to insert the exchange rate as a specific risk factor to its forecasts on export economics.

{snip}

Throughout the March report, the BREE presumed that a lower exchange rate would support exports across Australia’s commodities. Fast-forward three months and the BREE has gone from a 2014-2015 forecast of 0.86 for the Australian dollar versus the U.S. dollar to 0.90 for this period. The catalysts for a lower currency have all disappointed so far. {snip}

{snip}

Perhaps most perplexing for the BREE (and me) is that the Australian dollar has fallen alongside iron ore year-to-date. {snip}


The Australian dollar has appeared oblivious to the plunge in iron ore in recent months

The Australian dollar has appeared oblivious to the plunge in iron ore in recent months


Source: barchart

{snip}


A relatively benign projection of the price of iron ore

A relatively benign projection of the price of iron ore


Source: BREE

The drop in iron ore has not prevented Australia from realizing revenue gains from its exports. {snip}

The BREE’s expectations for imports and exports among the major players shows a major surplus. {snip}


Where is Australia's extra production going?

Where is Australia’s extra production going?


Source: BREE

This chart makes me wonder about Rio Tinto’s (RIO) recent claim that China will be ready to absorb Australia’s surging production of iron ore.

Overall, iron ore is helping to maintain a relatively strong forecast for GDP growth in Australia. However, the stubbornly strong Australian dollar is cited as a major risk factor. Instead of the story from the March report of a currency supporting future growth, the Australian dollar has now become a risk factor for growth. {snip}

Next up should be the Reserve Bank of Australia (RBA) using the language of the BREE to put a slightly brighter spotlight on the surprising strength in the Australian dollar. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on June 26, 2014. Click here to read the entire piece.)

Full disclosure: (marginally) net short Australian dollar

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