ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Jul
29

Forgo the United States Oil ETF In Favor Of the United States Gasoline ETF?

written by Dr. Duru
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I recently read an article that attempted to dive into the nuances of trading the United States Oil ETF (USO) versus the United States Gasoline ETF (UGA). I suddenly realized that through all the nuanced comparisons the forest was being lost for the trees. Since at least 2009, UGA has greatly outperformed USO. In fact, the dominance is so great that for longer-term holders UGA is the clear winner.


UGA clearly dominates USO in long-term performance

UGA clearly dominates USO in long-term performance


Source: FreeStockCharts.com

A pairs trade shorting USO versus going long UGA is an even better long-term strategy and would have delivered positive long-term gains despite the recent plunge in the oil patch. Most of these gains come thanks to the accelerated out-performance of UGA over USO in 2015.


The ratio of UGA versus USO demonstrates the out-performance in even greater clarity.

The ratio of UGA versus USO demonstrates the out-performance in even greater clarity.


Source: StockCharts.com

These charts make me rethink how I approach the oil trade (for example, see “The Commodities Crash Accelerates: Scenarios for Trading Oil“). My only hesitation from jumping on a trade that assumes UGA out-performance over USO is that the UGA/USO ratio has accelerated so much in 2015 that a pullback seems to be very likely just from a technical standpoint. Moreover, USO seems very likely to bounce soon and initiating a short would be much better to do at higher prices from current levels.

Note that I have executed the USO rangebound trade as described in the earlier piece.

Be careful out there!

Full disclosure: long USO call options, short USO call and put options

Jul
28

T2108 Update (July 28, 2015) – An Important Stock Market Turnaround

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: 28.7%
T2107 Status: 35.2%
VIX Status: 13.4
General (Short-term) Trading Call: Neutral
Active T2108 periods: Day #192 over 20% (overperiod), Day #3 under 30%, Day #7 under 40%, Day #47 under 50%, Day #64 under 60%, Day #263 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 market simply could not wait for the U.S. Federal Reserve to give its usual “all clear” signal this time around.

The Fed announces its next monetary decision tomorrow (Wednesday, July 29). The market looked like it was headed into true oversold conditions just in time to let the Fed work its powers of soothing. In the T2108 Update for last Friday, I laid out all the bearish signs that had converged as T2108 hovered above oversold conditions. I was hoping that the S&P 500 (SPY) would retest support at its 200-day moving average (DMA) just as T2108 broke below 20% (oversold): such a combination would trigger my rules to aggressively buy the index. Instead, the index PERFECTLY retested its 200DMA (you can’t make this stuff up!) while T2108 stubbornly got only as low as 24%. T2108 did not even crack the low from the previous cycle of fear.


The S&P 500 completes a picture-perfect retest of 200DMA support with a subsequent rally of 1.2%

The S&P 500 completes a picture-perfect retest of 200DMA support with a subsequent rally of 1.2%


Although my ideal trading conditions did not trigger, I was still prepared to benefit from a bounce because the volatility index, the VIX, triggered the related “fade volatility” trade. On Monday, the VIX traded above the 15.35 pivot. With T2108 “close enough” to oversold (meaning it is below 30%), I nibbled on some put options on ProShares Ultra VIX Short-Term Futures (UVXY).

%stocks>40DMA was 24.8% at lows today. #VIX struggling around 15.35 pivot. $UVXY fades. #120trade #T2108 S&P 500 bounce off 200DMA $SPY

— Duru A (@DrDuru) Jul. 27 at 07:53 AM


I had expected to accumulate MORE puts on UVXY ahead of the Fed. Instead, I ended up taking profits as the volatility index plunged well below the 15.35 pivot.

%stocks>40DMA was 24.8% at lows today. #VIX struggling around 15.35 pivot. $UVXY fades. #120trade #T2108 S&P 500 bounce off 200DMA $SPY

— Duru A (@DrDuru) Jul. 27 at 07:53 AM



The volatility index (VIX) plunges 14% ahead of the Fed's opportunity to reassure markets

The volatility index (VIX) plunges 14% ahead of the Fed’s opportunity to reassure markets


The Australian dollar added confirmation that the market hit an important turn-around as it held steady against the Japanese yen. On Monday, AUD/JPY approached the previous low but did not break it.


The Australian dollar holds support against the Japanese yen. A fresh breakdown would have flagged a freshly bearish signal.

The Australian dollar holds support against the Japanese yen. A fresh breakdown would have flagged a freshly bearish signal.


Despite all these positive signs of a turn-around, I am definitely NOT giving the “all clear” signal just yet. The bearish signals that led to this latest encounter with oversold conditions are not yet invalidated. For starters, the S&P 500 needs to at least close above its 50DMA; even better, it needs a new all-time high. AUD/JPY needs to clear recent congestion (say over 92.4) rather than get turned back like a brick wall. T2107, the percentage of stocks trading above their 200DMAs, rallied today with the market but this longer-term signal remains BELOW the low of the last cycle of fear. I will be monitoring all these signals including the VIX.

I am NOT using the Shanghai Composite Index (SSEC) as a market signal, but I AM intrigued to see how well the market rallied even as SSEC gapped down to start trading in China and closed with another loss on the day. The Chinese government is clearly still watching the technicals closely. The gap down was stopped cold right at 200DMA support. THIS stuff you CAN make up – at least the Chinese government can!


How long can the Chinese government keep the Shanghai Composite Index propped up with so much selling pressure and entry at such obvious buy points?

How long can the Chinese government keep the Shanghai Composite Index propped up with so much selling pressure and entry at such obvious buy points?


In other important/interesting trading action, I have Caterpillar (CAT), Grub Hub (GRUB), and Apple (AAPL).

As regular readers know, CAT is my favorite hedge against market bullishness. Today, however, it turned into my favorite play on oversold conditions. My trading mentor has created a fantastic stock scan website called SwingTradeBot. On Monday, one particular scan caught my eye:


There was CAT! After seeing the stock had closed four days in a row below its lower-Bollinger Band (BB), including a post-earnings gap down, I immediately put the stock on my buy list. This kind of selling pressure leads to oversold conditions and few stocks can sustain positioning beyond the BBs for long. Monday’s doji, aka a small body, is another classic bottoming sign that shows that buyers and sellers fought to a stalemate.

The term “Gilligan’s Island Buy Setup” is a bit silly and not intuitive. Here is the definition from a concept called “hit-and-run trading” from the book Hit & Run Trading: The Short-Term Stock Traders Bible. Copied from the SwingTradeBot site…

  • A stock must gap open to a new two-month low. The bigger the gap the better.
  • The stock must close at or in the top 50 percent of its daily range and equal to or above the opening.
  • For the buy: The next day only, buy 1/8 point above today’s high.
  • Risk 1 point.
  • Carry the position overnight if it closes strongly.

CAT easily met the first two conditions with Monday’s close. Tuesday’s open met the third condition. Risking just over a point would break to a fresh multi-year low, so the fourth condition was easy. Given the strong open, and the high odds that an oversold bounce was underway, I loaded up aggressively on call options. I was prepared to hold until the close to test the last condition. Much to my surprise, in less than an hour, my position had already doubled in value, and CAT was up around 2.5%. Under THOSE conditions, I had to take the profit off the table in extreme gratitude. If I had waited for the last condition, I would have seen the position growth almost 4x as CAT closed up 3.3%.

The buying volume and trading action was SO strong that CAT effectively left behind an abandoned baby bottom. This pattern traps bears who chased the last gap down only to find themselves in an instant loss on a gap up the next day. The CAT bears are now under pressure to close and run. This pattern alone makes me more optimistic for the market in the short-term. THIS could potentially be the most important turn-around of all the turns I have shown in this T2108 Update.


Caterpillar (CAT) sprints higher and leaves behind a a STRONG bottoming pattern on equally strong buying volume. Shares traded on the day surpassed the previous selling days.

Caterpillar (CAT) sprints higher and leaves behind a a STRONG bottoming pattern on equally strong buying volume. Shares traded on the day surpassed the previous selling days.


GrubHub (GRUB) had a chaotic day of post-earnings trading. The previous day, a downgrade instantly knocked the stock down to retest of all-time lows. Traders and investors naturally feared that the downgrade indicated GRUB had very bad news in store. Instead, GRUB produced pedestrian numbers, far from alarming. The resulting gap up rammed the stock right into resistance at the 50DMA. Sellers went to work immediately from there. It took me a while to understand what could be going on. And then I saw that a conference call was coming at 10am Eastern. So, essentially, whoever did not get a chance to panic and sell the day before was scrambling to use the post-earnings gap up to get out ahead of what HAD to be the real bad news. The stock made a fresh all-time low just ahead of the conference call. The stock bounced from there and chopped away to a net 7.2% gain on the day.

This action was a lesson in the dangers of panic. For me, it was a lesson in patience as I rushed in to buy into today’s panic. The subsequent bounce did allow me to get out with a gain, but I would have performed a LOT better by simply waiting for some (ANY!) sign of buying interest.


GrubHub (GRUB) violently trades around earnings

GrubHub (GRUB) violently trades around earnings

This 5-minute chart shows the sharp sell-off in the morning just ahead of the 10am conference call. Cooler heads prevailed in the end.

This 5-minute chart shows the sharp sell-off in the morning just ahead of the 10am conference call. Cooler heads prevailed in the end.


After all the pre and post-earnings angst, Apple (AAPL) is simply trading at the lower end of an on-going trading range. The 50DMA remains the presumed pivot within this trading range. I missed the nice surge off post-earnings lows. I am looking for another bounce off the bottom of the trading range. (I know I still owe you readers an update on all the pre/post-earnings data on AAPL!)


Apple (AAPL) continues to stick by its trading range

Apple (AAPL) continues to stick by its trading range


Among today’s scans from the SwingTradeBot is this one…


My eyes once again lit up. I know I said in “The Only Remaining China-Based Trade I Like” that I am going to leave Baidu (BIDU) alone even with its tendency to bounce sharply from steep sell-offs. Given my experience with CAT, I am likely going to make an exception this time if BIDU meets the “Gilligan” criteria tomorrow. Stay tuned…!


Sellers squash Baidu (BIDU) well below its lower-Bollinger Band. Buyers took BIDU 6 points off the low. Can it at least reach its pre-earnings low before sellers return?

Sellers squash Baidu (BIDU) well below its lower-Bollinger Band. Buyers took BIDU 6 points off the low. Can it at least reach its pre-earnings low before sellers return?



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: short AUD/JPY, long AAPL call options

Jul
28

The Australian Dollar Suffers Pressures From All Corners – Except Rate Expectations

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on July 28, 2015. Click here to read the entire piece.)

When I last wrote about the Australian dollar (FXA), it was wavering at the 0.74 support level against the U.S. dollar. More importantly, market expectations for an August rate cut from the Reserve Bank of Australia (RBA) were soaring. Now, the 0.74 support level has given way and rate expectations have cooled off significantly.


The Australian dollar (FXA) continues to break through successive support levels and now sits at levels versus the U.S. dollar last seen May, 2009

The Australian dollar (FXA) continues to break through successive support levels and now sits at levels versus the U.S. dollar last seen May, 2009


Source: FreeStockCharts.com

The market's expectations for an August rate cut have plunged rapidly

The market’s expectations for an August rate cut have plunged rapidly


Source: ASX RBA Rate Indicator

Markets are also expecting just one more rate cut going forward, perhaps as far out as early 2016…


Just one more rate cut to go for this cycle of looser monetary policy?

Just one more rate cut to go for this cycle of looser monetary policy?


Source: ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve (as at market close on July 28, 2015)

The plunge in rate expectations is a big surprise since it comes at the same time that China is roiling with its Shanghai Composite Index (SSEC) still breaking down…


The Shanghai Composite Index (SSEC) exploded to the upside exactly a year ago. Even Monday's 8% plunge did not set a new low for the current sell-off.

The Shanghai Composite Index (SSEC) exploded to the upside exactly a year ago. Even Monday’s 8% plunge did not set a new low for the current sell-off.


Commodities-related stocks like Caterpillar (CAT) have confirmed in earnings that the mining sector important to Australia continues to implode…


Caterpillar (CAT) is falling the way of commodities as it revisits levels from late 2011

Caterpillar (CAT) is falling the way of commodities as it revisits levels from late 2011


Source: FreeStockCharts.com

And Fortescue Metals Group (FSUGY), a domestic iron ore miner, confirmed on July 23, 2015 what many analysts have feared and projected: China’s steel consumption has peaked. {snip}


Recent earnings failed to stem the downward momentum for Fortescue Metals Group

Recent earnings failed to stem the downward momentum for Fortescue Metals Group


Source: ASX – prices in Australian dollars

{snip} The Flash China General Manufacturing Output Index printed at a 16-month low for July. {snip}

As if all that were not enough, on Friday, July 24th, the Standard & Poor’s tip-toed around a potential downgrade of Australia’s top-rated debt….:

{snip}


The British pound has beaten a steady path up the staircase against the Australian dollar

The British pound has beaten a steady path up the staircase against the Australian dollar


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: long and short the Australian dollar against several currencies

(This is an excerpt from an article I originally published on Seeking Alpha on July 28, 2015. Click here to read the entire piece.)

Jul
27

The Commodities Crash Accelerates: Scenarios for Trading Oil

written by Dr. Duru
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Several authors have pointed out the difficulties in fashioning trades to take advantage of the movement in oil prices (for a recent example, see “Is Gasoline The Smart Oil Play? UGA Vs. USO“). Analyses counting off the bullish and bearish arguments on oil can fill many tomes. For example, there is fear of a drop in Chinese demand, renewed builds in inventory, and a painfully slow adjustment process on the supply-side. The main positive catalyst to consider is that the negative catalysts cannot get much worse. One of the most recent twists on the oil-related headlines is Morgan Stanley’s warning regarding the potential for a complete collapse in oil prices. It invoked images worse than the crash of 1986.

The reporting Bloomberg article pointed out that OPEC has surprisingly ramped up production ever higher even as fundamentals in the market do not appear to support the additional supply. The article includes a chart showing that OPEC now supplies a full 1 million barrels per day above and beyond the peak from 2014. Morgan Stanley thinks that OPEC is now stretched to the max. However, if Iran and Libya pile on along with on-going run-ups in U.S. production then “there would be little in analysable history that could be a guide for what’s to come.” This kind of looming fear is presumably behind the recent revival in OVX.

Through all the headlines, one bet continues to perform up or down – using options on the United States Oil ETF (USO) to bet on the rangebound performance of oil. I first described this bet in March. In early June, I provided an update to show the profitability of the trade as the rally off all-time lows stalled for the United States Oil ETF (USO). Now USO is challenging its all-time low again as (WTI) oil runs into the lows from March. Those lows in turn were levels last seen during the recession.


United States Oil ETF (USO) is now challenging what had looked like a sustainable bottom

United States Oil ETF (USO) is now challenging what had looked like a sustainable bottom


Source: FreeStockCharts.com

If recent lows on oil break, the next stop could very well be the lows from the last recession.

If recent lows on oil break, the next stop could very well be the lows from the last recession.


Sources: US. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma [DCOILWTICO], retrieved from FRED, Federal Reserve Bank of St. Louis, July 27, 2015.
US. Energy Information Administration, Crude Oil Prices: Brent – Europe [DCOILBRENTEU], retrieved from FRED, Federal Reserve Bank of St. Louis, July 27, 2015.

I have chosen this tension-filled moment of increasing volatility to get on board with the rangebound trade. I provide here a refresher on the trade and another update on performance.

After I laid out my “simple scenarios” for trading the United States Oil ETF (USO) in mid-June, the base case of trading around the 50-day moving average (DMA) – consistent with the assumption of rangebound oil – lasted for just 8 trading days. A 16% spike in the CBOE Crude Oil Volatility Index (OVX) on June 29th launched the bearish conditional on the simple trade. USO “only” lost 2.4% that day and almost reversed all its losses the next day. It was not until a massive breakdown on July 6th that USO delivered confirmation of the bearish bias. OVX also closed above its pre-OPEC level and provided final confirmation of the bearish bias for USO per my simple scenarios.


The CBOE Crude Oil Volatility Index (OVX) is on the rise again and is threatening to break out.

The CBOE Crude Oil Volatility Index (OVX) is on the rise again and is threatening to break out.


Source: FreeStockCharts.com

It now appears OVX will remain elevated. A new uptrend will be in place if OVX breaks out above 44 or so. If such a breakout occurs, I will quickly move to trading an inverse oil bet like ProShares UltraShort Bloomberg Crude Oil (SCO) or even shorter-term put options until OVX ends the uptrend.

The original rangebound trade had the great advantage of selling put and call options right around the time OVX peaked; thus, the trade sold short hefty option premiums. That advantage shows in the results: with USO a bit below the levels where the trade was executed, the short January $19 and $20 2017 options have combined to deliver profits. The calculations below compare approximate option prices on March 5, 2015 versus prices on July 27, 2015.

Jan 2017 USO call options sold short
$19 Call: $3.42 vs $1.75 = gain of $1.67 or 49%
$20 Call: $2.95 vs $1.47 = gain of $1.35 or 50%

Jan 2017 USO put options sold short
$19 Put: $3.50 vs $4.85 = loss of $1.00 or 39%
$20 Put: $4.06 vs $5.50 = loss of $1.11 or 35%

For comparison, the net profit spread on this trade was around 15% on May 29th. Now, it is 10%. This 5% drop in the spread has occurred while USO has plunged 23%. This behavior is a feature, not a bug. Long-dated rangebound trading should perform within a tight window in the short-term since it is not a directional bet. Over the course of time, the gains should expand with greater speed if all is working according to plan.

In finally executing my own rangebound trade, I am first assuming that USO will NOT drop another 23% in two months. That would be the rough equivalent of oil dropping to or below $40, close to the recession lows as shown above. As a precaution, I started off my trade small anyway (after all, OVX is still well off its high this year). I sold equal amounts of January 2017 $15 put options versus January 2017 $19 call options. I picked $19 as the upside target given it coincides with the current level of the now declining 50DMA. I did not sell the same strike for the call options as the put options to reflect my bias that odds favor USO to trade higher than lower many months down the road. I also capped extreme losses from a massive and sudden upside surprise on USO by buying well out-of-the money USO call options. This slightly reduces profit potential but greatly increases comfort.

(For more context on my interest in trading commodities in the middle of an accelerating crash, see “The Commodities Crash Playbook: A Long Overdue Rewrite And Revision“).

Be careful out there!

Full disclosure: short USO put options, long and short USO call options

Jul
27

The Only Remaining China-Based Trade I Like

written by Dr. Duru
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The Shanghai Composite Index (SSEC) plunged 8.5% to start trading for the week. The ripple effects were wide and far-reaching even as arguments continue floating that the collapse in China’s stock market matters little outside of China and does not truly reflect on economic conditions in the country.

Apple (AAPL) CEO Tim Cook summed up a lot of the soothing words to-date during last week’s earnings conference call (from the Seeking Alpha transcript of AAPL’s Q3 2015 earnings conference call):

“…we remain extremely bullish on China and we’re continuing to invest. Nothing that’s happened has changed our fundamental view that China will be Apple’s largest market at some point in the future. It’s true, as you point out, that the equity markets have recently been volatile. This could create some speed bumps in the near term. But to put it in context, which I think is important, despite that volatility in the Chinese market, they’re still up 90% over the last year, and they’re up 20% year-to-date, and so these kind of numbers are numbers I think all of us would love.

Also, the stock market participation among Chinese household is fairly narrow. And the stock ownership is very concentrated in a few people who put what appears to be a smaller portion of their wealth in the market than we might. And so I think generally this has been, at least as we see it, maybe it’s not true for other businesses, that this worry is probably overstated. And so we’re not changing anything. We have the pedal to the metal on getting to 40 stores mid next year. As we had talked about before, we’re continuing to expand the indirect channel as well.”

Cook went on to quote a McKinsey study that estimates China’s middle class will grow from 14% to 54% of households from 2012 to 2022. I now put such estimates right up there with the iron ore miners who continue to lean on very bullish assumptions about China’s steel consumption over the next 10, 20+ years. They are using these forecasts to help them look past the current acceleration in the 4-year long collapse in commodities.

Regardless, I think no one should take any comfort in a massive short-term loss just because the gain over a year or so is still tremendous. Such a setup only tells me that the market still has plenty of room to fall and reverse course. One must wonder why the Shanghai Composite index exploded as it did just as China’s economic growth rate was finally slowing down.


The Shanghai Composite Index (SSEC) exploded to the upside exactly a year ago. Even today's 8% plunge has not set a new low for the current sell-off.

The Shanghai Composite Index (SSEC) exploded to the upside exactly a year ago. Even today’s 8% plunge has not set a new low for the current sell-off.

This monthly chart shows that since 2000, the Shanghai Composite Index has actually spent most of its time in decline. For all its explosiveness, the latest short-lived frenzy stopped well short of pre-crisis highs.

This monthly chart shows that since 2000, the Shanghai Composite Index has actually spent most of its time in decline. For all its explosiveness, the latest short-lived frenzy stopped well short of pre-crisis highs.


Source: FreeStockCharts.com

We have heard the “do not worry” in the financial news. Take July 27th’s Marketplace where various analysts weighed in on the insignificance of China, the world’s #2 economy…

  • China’s financial markets are mostly closed off to those outside of the country – foreigners own less than 2% of Chinese shares.
  • China is just 7% of U.S. exports.
  • A lot of the growth in China was bad growth: credit-fueled, over-investment. So, a slowdown in China will have a healthy cooling effect and transition China into more of a consumer than producer.

The last point was of course a masterful way of turning an alarming negative into a positive!

The stock market churn has been so unimportant that the Chinese government has panicked and executed extreme measures to manipulate market behavior. We outsiders received a swift reminder of the true nature of Chinese capitalism and likely the expectation in China’s financial markets that the government SHOULD “do something” to take control of the situation. Of course, China’s manipulation is probably just an overt and more heavy-handed version of the government intervention in Western economies to bring order out of the chaos of the financial crisis.


Yet, the extreme nature of the Chinese government’s interference makes its stock market extremely unattractive. No true rule of law seems to exist, and the government is free to do anything, including jail people who “illegally” sell their stocks, to accomplish its objectives. Own stock one day under one set of rules and wake up the next day with a different set. Under these circumstances, I am trying hard to avoid Chinese-related stocks, even my favorite Baidu (BIDU) which got crushed in after-hours about 8% after reporting its earnings. Normally, I would be licking my chops to jump on cheaper shares and take advantage of BIDU’s tendency to bounce sharply off oversold levels.

However, there is one China-related trade that still looks as good as ever: iShares MSCI Emerging Markets (EEM).


The latest breakdown in iShares MSCI Emerging Markets (EEM) has taken the ETF to lows from 2013

The latest breakdown in iShares MSCI Emerging Markets (EEM) has taken the ETF to lows from 2013


Source: FreeStockCharts.com

Chinese stocks are just a part of EEM, but I find EEM to be a good theme-based play on what is happening in the emerging markets that are greatly influenced by what is really happening in China. Most importantly, the options for EEM seem chronically under-priced. They rarely seem to take into account what I think are high odds for EEM to break sharply upward or downward. The 7% decline in 10 trading days has taken EEM past its lower-Bollinger Band (BB). Selling volume is picking up. A sharp bounce seems in the cards sooner than later.

I like to play EEM by going long “strangles”: the simultaneous purchase of out-of-the-money call and put options. The past several strangles I have executed on EEM have all made enough money on the put side so quickly that I was compelled to take profits. I keep hoping the call side of the trade will add to the profits but to no avail. This time around, I am expecting the profits to come from the upside. But the beauty of these strangles is that I am able to stay relatively agnostic about direction. I care a lot more about the speed of the move.

Here is an example of a trade I might initiate (I will announce it on StockTwits and Twitter with the #120trade hashtag), all options expire on August 21, a little over three weeks from now: the $37 call options sell for $0.52/0.57 bid/ask, the $35 put options sell for $0.37/0.40. If EEM just challenges resistance from its recent high, the call options deliver at least a triple and deliver plenty of profit to pay for the put options along the way. If EEM continues a plunge from here, I would expect increasing options premium to help make the puts at least valuable enough to pay for the call options. Either scenario can easily happen in three weeks. Previous experience tells me that one of them should play out within the next week.

There are of course other trades I have referenced that have direct dependence on China, like Caterpillar (CAT) and the Australian dollar (FXA). However, I China is not my #1 consideration for these trades.

Be careful out there!

Full disclosure: long AAPL call options, long and short various currencies against the Australian dollar

Addendum
The Nightly Business Report (NBR) for July 27th provided a few companies with large share of sales in Asia.

S&P 500 companies with the highest revenue exposure to China:
Skyworks Solutions (SWKS): 62%
Yum! Brands (YUM): 52%
Qualcomm (QCOM): 48%

Other companies with a large share of their sales in Asia in general:
Abbott Labs (ABT): 31%
3M (MMM): 30%
Schlumberger (SLB): 24%
ConocoPhillips (COP): 22%
Boeing (BA): 25%



Jul
27

The Commodity Crash Accelerates: A New Juncture for Buying Gold

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on July 27, 2015. Click here to read the entire piece.)

This month’s acceleration in the now 4-year sell-off in commodities seems to indicate that markets are getting serious about bracing for a tightening cycle from the Federal Reserve. I have mainly bought and traded gold as a hedge on Federal Reserve monetary policy. From this perspective, I can understand why gold (and commodities in general) is sliding in what SHOULD be the last few months before a first rate hike. However, based on the behavior of the futures markets in the past six weeks or so, I have concluded that there is a good possibility the Fed could capitulate on its pledge to hike rates in 2015 – especially given the case for a rate hike remains very mixed given weakness in global economies that now include Canada’s official entry into the club of advanced economies moving backward on rates.

While many analysts continue to insist that Fed is determined to start hiking rates in September, the 30-Day Fed Funds Futures as published by the CME Group Fed Watch have consistently produced different conclusions. {snip}


The odds for the timing of a first Fed rate hike has generally increased in the last month, but September is not even on the market's radar.

The odds for the timing of a first Fed rate hike has generally increased in the last month, but September is not even on the market’s radar.


Source: The CME Group Fed Watch

{snip}


The odds for a first rate hike flip from December to October on June 5th

The odds for a first rate hike flip from December to October on June 5th

The odds for a first rate hike flip back to October from December on June 15th

The odds for a first rate hike flip back to October from December on June 15th

The odds for a first rate hike flip from December to January, 2016 on July 2nd

The odds for a first rate hike flip from December to January, 2016 on July 2nd


Sources: The CME Group Fed Watch

So while commodities are sliding sharply this month, the possibility of a Fed surprise makes current levels very enticing. The time to buy insurance is when the market provides it at a heavy discount and not when it is dear. I now see some signs in the SPDR Gold Shares (GLD) and in Google Trends that favor starting or adding to positions.

{snip}


The losses in SPDR Gold Shares (GLD) have accelerated this month

The losses in SPDR Gold Shares (GLD) have accelerated this month


Source: FreeStockCharts.com

My commodity crash playbook does not cover gold directly because of its role as a currency, but the principles of respecting trends and momentum have aptly applied. {snip}

While Friday’s bounce is encouraging, I am even more intrigued in the possibility of a bottom because of a shift in market sentiment as shown by Google Trends. {snip}


Google trends is flashing a buy signal as the search term "buy gold" surges in July without an accompanying pop in "sell gold"

Google trends is flashing a buy signal as the search term “buy gold” surges in July without an accompanying pop in “sell gold”


Source: Google Trends

{snip}

Be careful out there!

Full disclosure: long GLD

(This is an excerpt from an article I originally published on Seeking Alpha on July 27, 2015. Click here to read the entire piece.)

Jul
26

T2108 Update (July 24, 2015) – Bearish Signs Accumulate Just Above Oversold Conditions

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: 28.0%
T2107 Status: 34.8% (a 9-month low!)
VIX Status: 13.7 (8.7% gain)
General (Short-term) Trading Call: Neutral
Active T2108 periods: Day #190 over 20% (overperiod), Day #1 under 30%, Day #5 under 40%, Day #45 under 50%, Day #62 under 60%, Day #261 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 market continues to follow through on the bearish divergence I pointed out at the beginning of last week. The lags have finally caught up with the S&P 500 (SPY) with a clean breakdown from its 50-day moving average (DMA) on Friday.


The S&P 500 breaks down below its 50DMA and appears headed for a quick retest of 200DMA support

The S&P 500 breaks down below its 50DMA and appears headed for a quick retest of 200DMA support


The S&P 500 already appears headed for another retest of its 200DMA. I did not expect a return of selling pressure so soon. The Guggenheim S&P 500 Equal Weight ETF (RSP) is further emphasizing the bearish developments. RSP has already broken down below its 200DMA and seems very likely to break the low from early this month. Such a development would confirm a BEARISH downtrend from the recent highs for RSP.


Guggenheim S&P 500 Equal Weight ETF (RSP) continues an ever more ominous-looking breakdown

Guggenheim S&P 500 Equal Weight ETF (RSP) continues an ever more ominous-looking breakdown


The “good news” is that the next 200DMA retest for the S&P 500 SHOULD come with true oversold conditions: T2108 below 20%. If so, I will feel more comfortable getting aggressive on the next cycle of buying; that is, not just fading volatility but also buying call options on ProShares Ultra S&P500 (SSO). The increasingly bearish action on RSP will likely make me even quicker to take profits than in the last cycle.

T2108 closed at 28%. Below 30%, T2108 becomes “close enough” to oversold to trigger related trades. However, I held my fire given I think the S&P 500 still has a 200DMA retest in its near future. Moreover, the volatility index (the VIX) is still below the 15.35 pivot and has yet to spike with a force anywhere close to what we just saw earlier this month. I was primed to start fading volatility on a retest of the pivot point but of course my orders never filled.


Fear fatigue? The volatility index (the VIX) is nowhere near the levels of the previous market selling cycle.

Fear fatigue? The volatility index (the VIX) is nowhere near the levels of the previous market selling cycle.


Another ominous sign comes from T2107, the percentage of stocks trading above their 200DMAs. Like RSP, it is officially leading the market lower as it reveals the true weakness underneath the hood. At 34.8%, T2107 closed at levels last seen in October of last year when T2108 was finally bouncing out of true oversold conditions.

And if THAT is not enough to cause concern, the Australian dollar (FXA) versus the Japanese yen (FXY) is confirming ALL of this weakness with a fresh tug downward. If it breaks the intraday low from July 8th, then I will have to take a pause no matter where T2108 is trading and re-evaluate my trading strategy.


The Australian dollar is flashing red again as it approaches its recent lows against the Japanese yen

The Australian dollar is flashing red again as it approaches its recent lows against the Japanese yen


I sold my Caterpillar (CAT) puts just ahead of earnings.

Sold (closed) $CAT puts. Rapid plunge pushing beyond lower-Bollinger Band as test of 2012 lows in play. #120trade

— Duru A (@DrDuru) Jul. 22 at 06:50 AM


Earnings turned out to be particularly brutal for CAT. The intense selling pressure persisted right into Friday’s close. The stock is now trading at levels last seen in September, 2011. The collapse in commodities has truly accelerated. Readers may have recognized an increasing number of commodity-related posts as I am scrambling to apply trades against my Commodities Crash Playbook and make sure I do not miss the opportunities that abound right now (on the long AND short side!).


Caterpillar (CAT) added more emphasis to July's acceleration of the years long collapse in commodities

Caterpillar (CAT) added more emphasis to July’s acceleration of the years long collapse in commodities


Perhaps the biggest exclamation mark from Friday came from Amazon.com (AMZN). The stock was a darling as it gapped up an amazing 20%. However, sellers immediately went to work and by the close, AMZN lost half its percentage gain. It was a Google (GOOG) style eruption that ended in a bit of a whimper.


Amazon.com (AMZN) has a monster gap that turns into a monster fade. Net-net is a 9.8% gain that does not feel quite as good as it otherwise could have!

Amazon.com (AMZN) has a monster gap that turns into a monster fade. Net-net is a 9.8% gain that does not feel quite as good as it otherwise could have!


Although AMZN was an easy target or fading because it was sooooo far above its upper-Bollinger Band (BB), I was actually focused on buying opportunities. AMZN TENDS to do well off its post-earnings open, but I adjusted my post-earnings approach to looking for buyable intraday pullbacks. The first one worked so well that I plowed the profits (and more) right back into another attempt later in the day. The second time was NOT a charm.

Speaking of Google (GOOG), the stock is officially in reversal mode as it has begun to fill its post-earnings gap up. The inability for buyers to keep up the enthusiasm for these immense post-earnings moves is itself a bearish warning. I will be looking for these stocks to at least stabilize in the coming week; otherwise, the stock market could be in for a lot more trouble.


Google (GOOG) suddenly seems ready  to give back the historic $65B in market cap it gained in the one day after earnings last week

Google (GOOG) suddenly seems ready to give back the historic $65B in market cap it gained in the one day after earnings last week


Oh – and did I mention the U.S. Federal Reserve has another meeting and monetary decision this week? If the VIX spikes further ahead of the release of a decision on the 29th, I will make sure to at least start a fade on the VIX.

Yes – there are a LOT o important signals to monitor this week!


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: short AUD/JPY, long AMZN call options

Jul
25

Even Cocoa Starts to Waver In the Face of the Collapse In Commodities

written by Dr. Duru
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A month ago, I wrote about the resilience of cocoa prices in the face of an avalanche of weaker agricultural prices. Given my opportunistic strategy for trading cocoa through the iPath Bloomberg Cocoa SubTR ETN (NIB), I laid out a price target for locking in profits on the latest trade. I have since sold my holdings in NIB and am now looking for the next entry point. That next entry may be coming in the next month or so as even cocoa seems to be wavering in the facing of an intensifying sell-off in commodities.


The iPath Bloomberg Cocoa SubTR ETN (NIB) ends the weak with a red flag: a gap down and breakdown below support at the 50-day moving average (DMA)

The iPath Bloomberg Cocoa SubTR ETN (NIB) ends the weak with a red flag: a gap down and breakdown below support at the 50-day moving average (DMA)


Source: FreeStockCharts.com

Per my commodity crash playbook, I am priming myself to load up on NIB under the assumption the current sell-off is heading toward a crescendo sooner than later.

There have been several important news items since I last wrote about cocoa.

Ghana’s output for the 2014/2015 season came to about 653,000 tonnes. This output was well short of the 1M originally forecast. Factors blamed for the shortfall include poor weather, and insufficient fertilizer and pesticides. Ghana’s cocoa crop was hit hard by diseases like black pod. (See “Ghana says has sold enough cocoa to service 2014 loan“). The crop for the next season should be much larger. The Ghanaian government has issued a forecast 900,000 tonnes. Skepticism should abound but as soon it seems likely this forecast will prove true, I expect cocoa prices to take a dip. If prices have not fallen by then, it should provide a good buying opportunity for NIB.

The biggest wildcard comes from Ivory Coast, the world’s #1 cocoa producer. Earlier this month, farmers were alarmed by heavy rains and overcast conditions that threatened to damage the flowers budding for next season’s crop. Clearly, under these conditions, a fall in NIB from general pressure on agricultural commodities would present a clear buying opportunity.

Be careful out there!

Full disclosure: no positions

Jul
24

Illinois Flood Disaster Does Not Prevent Corn from Rejoining the Collapse in Commodities

written by Dr. Duru
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Illinois Governor Bruce Rauner asked the U.S. Department of Agriculture to declare a disaster in areas of the state hit hard by flooding. He should have asked for disaster relief on behalf of all the nation’s corn.

Illinois was the nation’s #2 producer of corn in 2014, but the potential damage from on-going flooding in the state is not helping to prop up the price of corn. June was Illinois’s wettest June on record and so far in July central parts of the state are already double normal levels. Unfazed, traders have sent corn spiraling downward the last two weeks as the grain rejoins the on-going collapse in commodities.

Last month, it seemed like corn, and by extension the Teucrium Corn Fund (CORN), had finally found a resting spot in relief from an extended sell-off that started anew with the new year. Corn reports at the end of June helped to confirm the rally in CORN. This rally ran about 20% in just one month, but it is getting a serious test here. CORN has completely reversed the gains from the Grain Stocks report on June 30th. CORN closed Friday teetering right at its 50-day moving average (DMA) (red line in the chart below).


Teucrium Corn ETF (CORN)  is suffering from a sell-off as sharp as the preceding rally. Only the 50DMA stands now between a resumption of the downtrend and hope for a recovery

Teucrium Corn ETF (CORN) is suffering from a sell-off as sharp as the preceding rally. Only the 50DMA stands now between a resumption of the downtrend and hope for a recovery


Source: FreeStockCharts.com

The week began with the latest crop progress report. Corn conditions are still running slightly behind the pace from a year ago with the “excellent” category suffering the largest gap (thanks in large part to the poor showing from Illinois).

Several potential explanations could apply to CORN’s plunge. I am focused on what the collapse in commodities is saying or SEEMS to say to traders about the condition of the Chinese economy. China is the world’s #1 driver of many commodities. For corn, China’s consumption of pigs looms large. To the extent China is entering an economic slump, meat could become much more of a luxury than it already is. A drop in meat consumption will send corn demand downward as well. Forward-looking traders have to keep this potential impact on the radar.

Since I did not manage to buy an additional tranche of CORN shares to play the last rally, I do not have a profit cushion to help take the sting out of the current sell-off. Per my commodity crash playbook, I WILL be looking for the next buy point. Short-term traders can consider a purchase here if CORN manages to jump on Monday and demonstrate that the 50DMA has become likely support. Shorts are likely to pres their bets if CORN cannot hold current levels. Grain Hedge is also looking at technical factor to support the price of corn at this juncture.



Be careful out there!

Full disclosure: long CORN

Jul
24

The Bank of Canada Confirmed A Bearish Turn for the Canadian Dollar

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on July 24, 2015. Click here to read the entire piece.)

{snip}


The United States Oil ETF (USO) has broken down along with the the fresh plunge in oil prices

The United States Oil ETF (USO) has broken down along with the the fresh plunge in oil prices


In the middle of this fresh decline, the Bank of Canada delivered its July Monetary Policy Report with another rate cut included. The reaction in the currency market was just as dramatic as the January rate cut. This time the Canadian dollar (FXC) hit levels last seen at the height of the financial crisis.


The U.S. dollar has broken out once again versus the Canadian dollar

The U.S. dollar has broken out once again versus the Canadian dollar


Source for charts: FreeStockCharts.com

The latest surge in USD/CAD is effectively a continuation of a net bounce off the 50-day moving average (DMA). I did not interpret this firm support as bearish for the Canadian dollar because at the time I assumed oil would at worst remain in a tight trading range. Even as I began to transition my trading bias on oil to bearish, I did not even consider another rate cut as a real enough possibility from the Bank of Canada. This blind spot was a result of my commitment to a longer-term bullishness on Canada, its economy, and its currency; I described my change from bearishness to bullishness in several pieces this year. The headwinds blasting at this bullishness remind me why in almost all cases I prefer to trade currencies with a short leash!

After reviewing the Monetary Policy Report (MPR), reading the opening statement of Governor Stephen S. Poloz, and watching the subsequent press conference, I have concluded that the Bank of Canada’s rate cut served very little purpose beyond confirming that the Bank is afraid economic conditions in Canada are at risk of getting much worse before they improve. The Bank is leaning ever more heavily on leveraging its exchange rate to push exports of non-energy related products into catalyst for GDP growth.

Three charts from the MPR that essentially tell the entire story for me.

{snip}


A marked decline in Canada's measures of incomes

A marked decline in Canada’s measures of incomes


Source: Bank of Canada Monetary Policy Report, July, 2015

{snip}


Only a lower exchange rate has prevented Canada's economic performance from being even worse

Only a lower exchange rate has prevented Canada’s economic performance from being even worse


Source: Bank of Canada Monetary Policy Report, July, 2015

{snip}


A dangerous decline in exports

A dangerous decline in exports


The dynamics shown in the above charts suggest to me that the Canadian dollar likely DOES need to get even weaker for Canada’s economy to regain its footing. The rate cut last week is a step toward achieving that goal.

Even more unsettling – the Bank is at a loss trying to explain the unexpectedly poor performance of exports and yet feels very comfortable cutting rates. I now wonder aloud whether the Bank has already accepted a very real possibility that quantitative easing is in its future?!?

{snip}

Poloz was not able to credibly explain how else the Canadian economy will benefit from a cut from 0.75% to 0.50% when the housing market in Canada’s largest cities are already booming and households are facing precarious debt imbalances. {snip}

{snip}

The rate cut HAS firmly planted Canada on the other side of the fence in a global economic story increasingly defined by policy divergence. {snip}

It is indeed all about the U.S.: “Over the remainder of 2015 and through 2016–17, Canadian exports should benefit from the growing strength of Canada’s major trading partner, the United States.”

{snip}


The 83% of Canada's economy outside of commodities is chugging along OK

The 83% of Canada’s economy outside of commodities is chugging along OK


Source: Bank of Canada Monetary Policy Report, July, 2015

{snip}


Speculators have quickly ramped net bets against the Canadian dollar

Speculators have quickly ramped net bets against the Canadian dollar


Source: Oanda’s CFTC’s Commitments of Traders

So at some point soon, I will lick the wounds, cut the losses, and reposition. The timing will depend on how the current collapse in commodities plays out. My sense is that the selling has become over-extended. In particular, I want to wait to see what happens if (when?) oil retests its recent lows. Stay tuned!


Oil seems headed for  very important retest of gut-wrenching lows

Oil seems headed for very important retest of gut-wrenching lows


Source: US. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma [DCOILWTICO], retrieved from FRED, Federal Reserve Bank of St. Louis, July 23, 2015.
US. Energy Information Administration, Crude Oil Prices: Brent – Europe [DCOILBRENTEU], retrieved from FRED, Federal Reserve Bank of St. Louis, July 23, 2015.

Be careful out there!

Full disclosure: long FXC, short USD/CAD

(This is an excerpt from an article I originally published on Seeking Alpha on July 24, 2015. Click here to read the entire piece.)

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