ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Nov
28

T2108 Update (November 28, 2014) – A Potentially Bearish Retreat from Overbought Conditions As Commodities Swim A Sea Of Red

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

T2108 Status: 63.5%
T2107 Status: 52.8%
VIX Status: 13.3 (increase of 10.4%)
General (Short-term) Trading Call: Hold (bullish positions) – see below for caveats
Active T2108 periods: Day #29 over 20%, Day #27 over 30%, Day #24 over 40%, Day #22 over 50%, Day #17 over 60% (overperiod), Day #99 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


The sun sets on the oil patch

The sun sets on the oil patch


Source: Business Insider, © AFP/File Karen Bleier

“@howardlindzon: Never seen an energy sea of red like this in Stocktwits trending … $USO #oil http://stks.co/d1Inj”

A sea of red for energy-related stocks

A sea of red for energy-related stocks

This post on StockTwits says it all for the a holiday-shortened day of trading in the U.S.

OPEC confirmed it is trapped into continuing to produce oil into a declining price environment, and the results in the oil patch were dramatic. The impact was far-reaching as it seems the entire commodities-related complex went into a freefall on the day. So, I can excuse T2108 from backing off over-bought conditions as it tumbled 4 percentage points to 63.5% despite the S&P 500 barely budging to the downside.


The S&P 500 does not even show a hint of the carnage extending throughout the world of commodities

The S&P 500 does not even show a hint of the carnage extending throughout the world of commodities


The strategy I outlined for trading overbought conditions dictates sending up a definitive red flag warning of a potential top in the market. However, the tension here is that falling energy prices are also good for consumption of a whole host of other goods. Indeed, the IMF supposedly estimates that each $10 plunge in oil prices adds about 0.2 percentage points to global GDP growth. So, it is very possible that the stock market continues its rally but at a much slower pace as energy-related stocks continue to weigh on the index.

My tune will get bearish if the S&P 500 follows through with more selling next week that produces a close below 2052 or so. This would close the gap up from the surprise Chinese rate cut. It would also end the nice uptrend through the channel creates by the first and second Bollinger Bands (BB).

There was also an interesting dichotomy in the two main resource-related currencies: the Canadian dollar (FXC) and the Australian dollar (FXA).

Canada delivered great GDP growth results for the previous quarter, but it was not enough to slow down the commodities train wreck:


The Canadian dollar weakens despite a strong GDP print - selling in the oil-patch dominates trading

The Canadian dollar weakens despite a strong GDP print – selling in the oil-patch dominates trading


Given this move, I would expect the Australian dollar to get absolutely hammered. Quite the opposite. AUD/USD actually RALLIED and ended the day with a gain despite a late pullback. Most important for trading purposes, the Australian dollar held firm against the Japanese yen (AUD/JPY). This made my buy of the dip earlier in the week even more fortuitous. I thanked my lucky stars and snatched my profits.


The Australian dollar versus the Japanese yen holds firm against otherwise bearish signals taking root elsewhere

The Australian dollar versus the Japanese yen holds firm against otherwise bearish signals taking root elsewhere


Despite my hasty exit from the long AUD/JPY position, I still consider this current stability a strong signal that invalidates any bearish misgivings I may otherwise harvest. I just did not want to leave these profits on the table over the weekend. Regardless, you can bet that I am watching AUD/JPY even more closely now.

There is SO much I would love to write about the oil patch and the collapse in commodities in general. I hope to dribble these out over time. For one thing, it is definitely time to update and upgrade my old Commodities Crash Playbook from 2011! (“Preparing for Profits in a Resource-Constrained World” and
Profiting from Physical Assets in a Resource-Constrained World – Rules and Picks“). For now, I turn your attention to Energy Select Sector SPDR ETF (XLE) and PowerShares DB Oil ETF (DBO).

Readers may recall my fortuitous short of XLE that was interrupted by the Halliburton Company (HAL) deal to acquire energy services competitor Baker Hughes Incorporated (BHI). As luck would have it, I could have held that short position even if it meant watching my profits melt away before hitting the real jackpot.


With only a half day of trading available, traders rushed for the XLE exiits with particular speed and alacrity

With only a half day of trading available, traders rushed for the XLE exiits with particular speed and alacrity


This breakdown in XLE is a classic follow-through of a bearish break of the 50DMA just two trading days ago. Technically, I should have been all over that move. My only defense is that I had little interest in trying to out-guess the politicizing and strategizing surrounding the OPEC meeting.

Now that the cat is out of the bag – and perhaps we are witnessing the beginning of the end of OPEC as we have come to know and love – trading opportunities abound. The FIRST thing that came to my mind is that HAL may have to back down out of its deal for BHI. The collapse in its stock price back to June, 2013 levels means that the deal for BHI has gotten ever more expensive. HAL is handing over 1.12 HAL shares and $19 in cash for every share of BHI. Those shares are now worth a lot less. Perhaps BHI will still be grateful for its savior and accept the same price. Perhaps this on-going plunge in oil prices does not change a thing. Maybe it even makes the deal MORE attractive because of supposed cost synergies. But just in case the odds of a deal collapse just got higher, I had no problem rushing in to buy April call options on HAL against April put options on BHI. Moreover, I think the out-sized beating being delivered to HAL is an expression of growing displeasure with the deal.


Traders rush for the exits from HAL in a massive display of force. An 11% loss in just one day.

Traders rush for the exits from HAL in a massive display of force. An 11% loss in just one day.

BHI is on its way to losing even the rumor-driven premium from the HAL deal

BHI is on its way to losing even the rumor-driven premium from the HAL deal


This trade should pay off if the deal collapses and HAL regains whatever premium it lost and BHI rushes downward to catch up to the rest of its cousins in the oil patch. It should also pay pay off if oil somehow finds a bottom and starts rallying again at some point soon. However, the gap down in DBO suggests that the latter is NOT the likely scenario.


A massive gap down for DBO as it loses 8.8% in one day

A massive gap down for DBO as it loses 8.8% in one day


Heck, if oil completely collapses going forward, this trade could even come out at least even as HAL and BHI tumble together. (Late addendum: someone on stocktwits informed me that HAL has to pay BHI a $3.5B termination fee if the deal falls through. So the bar for a collapse in this deal is VERY high!)

In the meantime, we have a BUNCH of stocks in the oil patch and commodities in general that look over-extended below their lower Bollinger Bands. I will not be surprised to see buyers rush in on Monday on the presumption that the low liquidity of shortened holiday trading exacerbated the downward action. This relief bounce should be very fade-able as the negative feedback loop is now firmly entrenched in the oil patch.

Just so you understand that the sell-off had far-reaching impact in the commodities space, I conclude with charts of Freeport-McMoRan Inc. (FCX), BHP Billiton Limited (BHP), and Rio Tinto plc (RIO).

FCX has some amount of oil-related assets but is mainly known for its copper mining. BHP is a very diversified miner with oil-related assets. RIO is much more a pure play on iron ore. I recently bought FCX as part of a desire to start scaling into the commodity collapse while the getting is good. I started with copper because it does not have the negative fedback loops working against it like iron ore and oil. I am still VERY bearish on iron ore, and I recently re-established a (hedged) bearish position in RIO. The prices in the chart for RIO show the approximate spot price of iron ore on that day. I left BHP alone because of its diversified position. I did not even think for a hot minute that a collapse in the oil patch could take BHP down so dramatically. I show weekly charts for FCX and BHP to show the seriousness of the breakdowns.

As a reminder, the QE2 and QE3 reference price marks where the given stock traded at the time the U.S. Federal Reserve announced its quantitative easing programs. So much for money-printing supporting and propping up asset prices in commodities!


The collapse in BHP Billiton Limited (BHP) is well underway as major multi-year support gives way

The collapse in BHP Billiton Limited (BHP) is well underway as major multi-year support gives way

Freeport-McMoRan Inc. (FCX) flirts with a major multi-year breakdown

Freeport-McMoRan Inc. (FCX) flirts with a major multi-year breakdown

No fresh multi-year low for RIO....yet. Perhaps the hopes of a Glencore savior is keeping the stock aloft.

No fresh multi-year low for RIO….yet. Perhaps the hopes of a Glencore savior is keeping the stock aloft.


Finally, I cannot conclude this post without showing the pounding Catepillar (CAT) took today. THIS chart gives me pause, and I am very happy to have a hedge riding on the back of CAT. If it breaks its 50DMA, look out below. Note how volume surged DESPITE the shortened trading day. Yikes.


Caterpillar reverses and invalidates the bullish breakout. Only the 50DMA sits between here and a bearish breakdown.

Caterpillar reverses and invalidates the bullish breakout. Only the 50DMA sits between here and a bearish breakdown.


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 SSO shares, short USD/CAD, long HAL call options, long BHI put options, long RIO call and put options, net long the Australian dollar, FCX

Nov
28

Providing Some Historical Perspective On Another Sharp Stock Market Rally

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

As expected for this November, the S&P 500 (SPY) has continued a string of closes at fresh all-time highs. While the index is only about 2.8% above its all-time high preceding the steep September-October sell-off, I have noticed commentary that this rally has moved too far, too fast, including direct expressions of disbelief.


The S&P 500 has made an impressive recovery from the September/October sell-off but is still less than 3% above its all-time high preceding the sell-off

The S&P 500 has made an impressive recovery from the September/October sell-off but is still less than 3% above its all-time high preceding the sell-off


Source: FreeStockCharts.com

The disbelief is reminiscent of some of the sentiment that followed the last rally off a sell-off…just three months ago.

{snip}


Annual Frequency of 28-Day Rallies Gaining at Least 10% on the S&P 500

Annual Frequency of 28-Day Rallies Gaining at Least 10% on the S&P 500


Source for price data: Yahoo! Finance

So in the recent memory of a lot of people, the current rally should indeed feel somewhat extreme. But such discomfort should be compared to the sell-off that preceded the rally. {snip}


Annual Frequency of 20-Day Sell-Offs Losing at Least 7% on the S&P 500

Annual Frequency of 20-Day Sell-Offs Losing at Least 7% on the S&P 500


Source for price data: Yahoo! Finance

Although these sell-offs are much less frequent than the current rally, recent years have seen a spate of such sell-offs. No surprise that 2008 delivered four of the 13 sell-offs since 2007. So, on balance, based on recent memory perhaps it makes sense that many might be more comfortable seeing sharp sell-offs than sharp rallies.

However, given over a longer timeframe the sell-off was indeed extreme and thus could (should?) have been seen for the buying opportunity that it represented as the market swung to oversold conditions (as defined by my favorite indicator, the percentage of stocks trading above their respective 40-day moving averages). {snip}

{snip}

Another objection could rest with the VIX, the volatility index, which is plunging all over again. {snip}


The fear has dissipated almost as quickly as it flared

The fear has dissipated almost as quickly as it flared


Source: FreeStockCharts.com

Finally, let’s compare the current rally to previous rallies relative to the VIX, the percentage of stocks trading above their 40DMAs (labeled T2108) and their 200DMAs (labeled T2107). Cells in yellow are more extreme than current levels for the respective indicator. (Collectively, data are only available since 1990).


Characterizing 28-Day Rallies on the S&P 500 Featuring At least 10% gains

Characterizing 28-Day Rallies on the S&P 500 Featuring At least 10% gains


Source for data: Yahoo! Finance for VIX and S&P 500, FreeStockCharts.com for T2107 and T2108

{snip}

Be careful out there!

Full disclosure: long SSO

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

Nov
28

Another Chocolate Scare – This Time Contrasting with Cocoa Price Action

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on November 24, 2014. Click here to read the entire piece.)

Nine months ago I wrote a piece describing the investment/trading opportunity in cocoa with a focus on iPath DJ-UBS Cocoa TR Sub-Idx ETN (NIB); iPath Pure Beta Cocoa ETN (CHOC) has extremely low trading volume. It took another two months for a dip to materialize but by then, NIB was no longer a high priority for me. It was a bad miss as the ETN proceeded to rally from there about 19% to its peak of the year in September.


Like most commodities, cocoa is well off its 2011 peak. However, it has enjoyed a very strong bounce from subsequent lows in 2012 and 2013

Like most commodities, cocoa is well off its 2011 peak. However, it has enjoyed a very strong bounce from subsequent lows in 2012 and 2013


Source: FreeStockCharts.com

With NIB now down about 18% from its 2014 peak, along comes another article motivating me to action: {snip}

Instead of reviewing the article in detail, I turn to the latest monthly review of the market from the International Cocoa Organization (ICCO) (for October, 2014).

{snip}

Currency fluctuations and shifts in the weather are not fundamental, lasting drivers of price, so I think it is OK to fall back on all the longer-term drivers that can drive production deficits into the future. As a reminder from my last piece:

{snip}

These are VERY attractive demand fundamentals because they are strong, persistent, and not likely to change anytime soon. Production is the big wildcard. So when temporary factors drive cocoa prices down, like now, I think it is time to buy. I bought NIB this past week; this time choosing to act immediately on my thesis. I am prepared to add some more if prices take another tumble.

{snip}

Be careful out there!

Full disclosure: long NIB

(This is an excerpt from an article I originally published on Seeking Alpha on November 24, 2014. Click here to read the entire piece.)

Nov
28

A Good Time for Adjusting the Bearish Trading Strategy on the Japanese Yen

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on November 23, 2014. Click here to read the entire piece.)

{snip} Ironically, this situation was essentially manufactured by these same authorities, but sure enough the first attempts to rein in the runaway train have appeared. Almost right on schedule, Japanese Finance Minister Taro Aso was quoted on Friday (November 21) warning that the yen’s fall has been too much, too fast. The comments had a minor impact on the yen (FXY) but of course did nothing to break the current downtrend in the currency. Here is a chart of the yen using CurrencyShares Japanese Yen ETF (FXY), an ETF that declines when the yen declines and increases when the U.S. dollar increases (the inverse of USD/JPY).


Sell-offs are nothing new to CurrencyShares Japanese Yen ETF (FXY) for almost three years

Sell-offs have been nothing new to CurrencyShares Japanese Yen ETF (FXY) for almost three years


Source: FreeStockCharts.com

Any commentary from Japanese government officials that run counter to the actions being taken to weaken the currency are simply not credible. {snip}

If the Japanese government, more specifically the Bank of Japan, were truly concerned about weakness in the currency, the massive increase in QE would have been carefully orchestrated and communicated. Whether implemented in phases or whether preceded by cascading rhetoric and jawboning, the Bank of Japan could have mitigated at least some of the rapid weakness in the currency. Moreover, poor economic numbers driven by a sales tax increase earlier this year serve to further weaken support for the Japanese yen.

The 115 to 120 level on USD/JPY is interesting because this is exactly where Japanese companies reportedly wanted the government to step in to intervene to strengthen the currency. Currency weakness is fine for making exports more attractive to foreign customers but it can come back and bite a nation like Japan that imports a lot of commodities. {snip}

{snip}

The strategy in the face of the surprise move was to follow momentum – shorting the yen on further weakness. That is, weakness confirmed more weakness to come. Now it seems to me the better strategy is to fade yen rallies. {snip}

Be careful out there!

Full disclosure: short Japanese yen

(This is an excerpt from an article I originally published on Seeking Alpha on November 23, 2014. Click here to read the entire piece.)

Nov
28

A Trader’s Perspective on Switzerland’s “Save Our Swiss Gold” Referendum

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

The euro (FXE) versus the Swiss franc (FXF) currency pair has dropped steadily all year on its way to a rendezvous against the 1.20 floor:


The euro/franc (EUR/CHF) currency pair has dropped steadily all year on its way to a rendezvous against the 1.20 floor

The euro/franc (EUR/CHF) currency pair has dropped steadily all year on its way to a rendezvous against the 1.20 floor


Since the end of the financial crisis, the Swiss National Bank (SNB) has insisted that its currency is extremely over-valued but to no avail. It took the 1.20 floor just to devalue the Swiss franc out of parity with the euro in 2011. The franc’s strength accelerated into that decision as if the market intended to force the SNB’s hand after so many prior threats from the SNB.


The franc is significantly stronger than the euro from where it stood 6 years ago. Only the 1.20 floor has prevented significantly more strengthening

The franc is significantly stronger than the euro from where it stood 6 years ago. Only the 1.20 floor has prevented significantly more strengthening


The SNB’s hand may be forced again. This time political forces – courtesy of the Swiss People’s Party (SVP) referendum called “Save Our Swiss Gold” – have aligned against the SNB. The SVP is the same party that successfully passed a referendum earlier this year called “Stop Mass Immigration.” The gold referendum will force the SNB to hoard gold and likely drive significant strength into the Swiss franc. {snip}

Traders should drool at the prospects of such an initiative. A major market player may be forced by law to execute well-known, clearly defined purchases. The SNB only has about 7.8% of its reserves in gold (a total of 1,040 tonnes), so the forced buying would be significant. The price of gold gets clear support and a currency gets backing by a physical commodity (or asset) which will tend to make the currency stronger. Yet, this is a case where there is just a small chance of a very big outcome. The referendum only has a small chance of becoming law because there are more procedures lying in wait even if the Swiss people pass this change to its Constitution. {snip}

This is also a case where the two elements of the trade are in completely opposite conditions. {snip}

The timeframe for the trading/investing opportunities is also different.

{snip}


GLD makes a surge off 4 1/2 year lows that has the look of a bottoming process

GLD makes a surge off 4 1/2 year lows that has the look of a bottoming process


Source for charts: FreeStockCharts.com

So, overall, given the low odds of a change to the status quo, I like starting to fade the Swiss franc ahead of the referendum vote. {snip}

I also like adding to gold here almost regardless of the prospects for the referendum. At the beginning of the year, I projected that gold would keep going lower for the year.{snip}

I conclude with a quick sentiment check on gold using Google trends. {snip}


In English, interest in "sell gold" continues to slowly wane while "buy gold"  has show a recent rekindling of interest

In English, interest in “sell gold” continues to slowly wane while “buy gold” has show a recent rekindling of interest

The German and French sentiment have not tipped any clear signal although it has matched spikes in English sentiment as recently as 2011

The German and French sentiment have not tipped any clear signal although it has matched spikes in English sentiment as recently as 2011


Source: Google trends

{snip}

Be careful out there!

Full disclosure: long AUD/CHF, long GLD, long GG

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

Nov
28

A Minor Intervention Scare for the Australian Dollar

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on November 13, 2014. Click here to read the entire piece.)

On November 13th (in the morning in Australia), Christopher Kent, an Assistant Governor at the Reserve Bank of Australia (RBA), delivered a speech discussing business cycles in Australia. The big news from this speech is what he said afterward (presumably during Q&A). From the Sydney Morning Herald:

“RBA assistant governor Christopher Kent may have scared a few traders by not ruling out an intervention to bring down the dollar, but few see it happening anytime soon.”

The reaction to Kent’s tease was sharp but relatively shallow all things considered for the Australian dollar (FXA)…


The Australian dollar slides quickly and starts to recover in response to non-committal commentary on the possibility of currency intervention

The Australian dollar slides quickly and starts to recover in response to non-committal commentary on the possibility of currency intervention

The drop is a blip in the larger scale of the Australian dollar's decline

The drop is a blip in the larger scale of the Australian dollar’s decline


Source: FreeStockCharts.com

Kent’s tease resonates given what his boss, Governor Glenn Stevens, said on August 20, 2014 in the Q&A period of his presentation of the Reserve Bank of Australia Annual Report 2013 at Australia’s House of Representatives Standing Committee on Economics.

The Chair of the committee asked the following question regarding currency intervention: “What would it take for the bank to intervene in FX markets to get the Australian dollar to move lower? In the past we have had submissions about jawboning, but what about taking other measures?”

{snip}

Be careful out there!

Full disclosure: net long Australian dollar (short versus the U.S. dollar)

(This is an excerpt from an article I originally published on Seeking Alpha on November 13, 2014. Click here to read the entire piece.)

Nov
27

How to Trade Growing Pressures On Herbalife’s Stock

written by Dr. Duru
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Here are the follow-up details on this tweet from Wednesday, November 26th, 2014.

Herbalife (HLF) has experienced a strong rally from recent lows. The stock has risen 9 out of the last 10 days on good trading volume. It is now resting just under resistance at the downward trending 50-day moving average (DMA).


Herbalife's bounce runs into its first critical test: potential resistance at the 50DMA

Herbalife’s bounce runs into its first critical test: potential resistance at the 50DMA


Source: FreeStockCharts.com

Adding to the intrigue in the stock is the decision of the Chairman/CEO to hold all the stock he acquired from exercising expiring stock options granted to him 10 years ago. This is essentially free money for him so the statement is not as significant as it could be. Still, it should be duly noted as a potentially positive catalyst…or at least the CEO recognized the potentially NEGATIVE press he and the company would receive from converting all this stock into cold, hard cash. From the press release on Tuesday, November 25 titled “Herbalife Chairman and CEO Increases His Personal Share Holding in the Company“:

“Global nutrition company, Herbalife (NYSE: HLF), today announced that Michael Johnson, Herbalife’s chairman and CEO, has engaged in a net exercise transaction involving 750,000 stock options that were granted to him in December 2004 and were due to expire in December 2014. Because of his complete confidence in the continued and future success of the company, Mr. Johnson has decided that he will hold all the shares issued on exercise of the option, which will be the total amount, net of those necessary to cover the exercise price and any taxes related to the transaction.”

Making this PR play more interesting and more important is the building negative sentiment aligning against the stock: it has suffered two big post-earnings gap downs and a -46% year-to-date performance.

Shares short have risen all year against HLF as bears press their bets. Shares short have returned to levels last seen in September, 2013 and represent a whopping 49% of the float!


Bears have nailed HLF this year as they press shorts into a declining stock

Bears have nailed HLF this year as they press shorts into a declining stock


Source: Schaeffer’s Investment Research

Options players have also been pressing their bets against HLF…


The put/call open itnerest ratio on HLF has soared this year in two major spurts. It is now at 2-year highs

The put/call open itnerest ratio on HLF has soared this year in two major spurts. It is now at 2-year highs


Source: Schaeffer’s Investment Research

Despite the growing anticipation that HLF will continue to decline, collapse even, implied volatility is well off its highs. This means the market is not pricing in a big move in HLF in the near-term.


Post-earnings, implied volatility is settling back to 2014 norms - indicative of a market that does not expect a big move in the short-term

Post-earnings, implied volatility is settling back to 2014 norms – indicative of a market that does not expect a big move in the short-term


Source: Schaeffer’s Investment Research

A very simple trading strategy can be constructed from all this information. It can even be conditioned on whether you are inclined to bias bearish or bullish.

If you are bearish on HLF, this is a GREAT place to put in an aggressive short (if you can find the shares!) or better yet, buy options. The implied volatility suggests options are relatively “cheap,” and options automatically cap your potential loss…unlike a short. Bearish positions should stop out with a close above the 50DMA resistance that gets follow-through buying. More cautions and measured bears or otherwise agnostic traders can wait for HLF to confirm renewed weakness with a pullback from 50DMA resistance that provides a close BELOW Wednesday’s low of $42.

As bears are stopping out (or should be) above the 50DMA, bulls or otherwise agnostic traders can step in with buys assuming the stock should maintain its momentum off the lows. A good short-term upside target is the 200DMA resistance or a fill of the last post-earnings gap down.

However, HLF resolves the tensions at 50DMA resistance, I strongly suspect the move will be sustained given the massively negative sentiment on the stock. Either an unwind of this negative sentiment will provide a powerful upward catalyst or a sustained increase in negative sentiment will turn the stock southward all over again. The tame volatility numbers suggest that the move may not be dramatic, but it could very easily be sustained.

Be careful out there!

Full disclosure: no positions (yet!)

Nov
26

The Squeeze On Renters And Implications for the Housing Market

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on September 7, 2014. Click here to read the entire piece.)

I tracked down an article posted in Boston.com called “Renters Suffer as Evictions Surge in U.S.” after hearing the topic referenced in a recent Slate Money podcast. One of the guests quoted a dire statistic that 1 in 6 renters in New Jersey has been served eviction notices. I had to track down the article because it is an alarming statistic yet the guest was surprisingly vague on details and overall context. Unfortunately, the article did not provide enough details to understand the scope, scale, and significance of this situation. In a typical style that emphasizes storytelling over definitive proof, the article scattered its facts and stats around very compelling anecdotes and tragic tales of individual hardship. {snip}

The lack of comprehensive stats suggests that the increasing eviction notices are more local than national in scope. {snip} The article even acknowledges that eviction rates can depend on the legal and regulatory environment in a city or state.

{snip}

The rising demand for, and tight supply of, apartments means landlords can now afford to be more exacting in their standards, if not outright aggressive in replacing renters with those who can pay more. {snip}


Multi-family housing starts have returned to highs last seen in the last housing boom.

Multi-family housing starts have returned to highs last seen in the last housing boom.


Source: St. Louis Federal Reserve

The evidence on (aggregate) landlord behavior under these conditions of tight inventory must be mixed. For example, RealPage (RP) claimed in an earnings report near the beginning of the year that landlords surprised their in-house economist by choosing to secure lease renewals rather than go after the higher rents enabled by extremely low vacancy rates.

{snip}

Click link for larger view…


The affordability squeeze on renters

The affordability squeeze on renters


Source: The Joint Center for Housing Studies of Harvard University

This point was further emphasized by an August 20th report from Zillow (Z) titled “July Data: Buying Is a Bargain, But Renting Remains Expensive“:

{snip}


A stark divergence in income necessary for owning versus renting

A stark divergence in income necessary for owning versus renting


Source: Zillow

{snip}

The resulting lack of entry-level inventory throws otherwise qualified households into an already crowded rental market where in an a different time, they would have instead been home owners.

{snip}

Be careful out there!

Full disclosure: long DHI, KBH

(This is an excerpt from an article I originally published on Seeking Alpha on September 7, 2014. Click here to read the entire piece.)

Nov
26

Million-Dollar Plus Homes and A Race for Affordability In California

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

Last month, I wrote about the strong sales activity in million dollar plus homes in Canada that are occurring despite poor jobs growth in the country. It was an interesting study in the growing dilemma facing major central banks who have robust housing markets heating up in slow-growth economies. This dilemma is not surfacing in the U.S. as various combinations of deflationary psychology, a cooling in housing sales, and overall housing activity that has still barely lifted off the post-recession bottom exist across many of America’s housing markets. However, the U.S. does have some strong housing markets and home builders are generally trying to focus their businesses on these areas. In at least one of these regions, the greater San Francisco (SF) Bay Area (and the state of California overall), million-dollar plus homes tell a particularly poignant story of how the scales are tipped toward the higher-end of the economic scale.

{snip}

The very high-end of the market is enjoying sales records across the board:

{snip}

Record high-end sales and soaring rents in the SF Bay Area

{snip}

For example, last month, the San Jose Mercury News reported on the “relentless rise” in Bay Area apartment rents. {snip}

Rent pressures across the country

{snip}


Prices of Apartment Properties Versus Prices of Single-Family Homes

Prices of Apartment Properties Versus Prices of Single-Family Homes


Source: “The State of the Nation’s Housing 2014“, The Joint Center for Housing Studies (JCHS) of Harvard University

Additions to the rental supply have focused on those most able to pay:

{snip}

These disparities have created a situation where affordability in the U.S. as a whole has improved for home buyers but not renters. {snip}

SF Bay Area dislocations

For the SF Bay Area these dynamics mean that those workers not enjoying the benefits of the tech-driven boom are making the time-honored trek to move further and further outside the core to find affordable housing and/or find ways to save for a down payment for an eventual home purchase. {snip}

Well-positioned home builders

The upshot of all these housing dynamics is that home builders like KB Home (KBH), Lennar (LEN), and Tri Point Homes (TPH) who have high concentrations of their business in California should continue to see good business in the state, and the SF Bay Area in particular. {snip}

{snip}

Be careful out there!

Full disclosure: no positions

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

Nov
26

T2108 Update (November 26, 2014) – FINALLY Overbought, Essentially (including Chart Reviews of DE and INTC)

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

T2108 Status: 69.99%
T2107 Status: 54.6%
VIX Status: 12.1
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #28 over 20%, Day #26 over 30%, Day #23 over 40%, Day #21 over 50%, Day #16 over 60% (overperiod), Day #98 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
So tantalizing part 2.

Hard to believe, but, yes, T2108 closed at 69.99% today.


T2108 continues to tease along the overbought threshold

T2108 continues to tease along the overbought threshold


This is a rounding away from 70% and so essentially represents overbought, especially after T2108 first crossed the 70% threshold 3 days ago and scraped along it since. Because my code that calculates historical relationships defines overbought strictly as 70.0% and above, I am not starting the counter just yet. For trading purposes, this milestone of 69.99% is definitely good enough to trade as if T2108 is overbought. Refer to the last T2108 Update for related trading rules.

The S&P 500 closed strong at its high of the day and a new closing all-time high. It did not beat out the intraday high though.


Looks like yet more room to run for the S&P 500

Looks like yet more room to run for the S&P 500


The VIX is continuing its downtrend as it hit 12.1%. Since a major fade from the 15.35 pivot last week, the VIX has been going down in a straight line by steady and nearly equal increments. There is still a short runway to go lower still. I have not shown the destructive impact on ProShares Ultra VIX Short-Term Futures (UVXY) in a while. Too bad I have not focused on put options on UVXY over the past week…


UVXY still knows no bottom

UVXY still knows no bottom


Or maybe I should have just stayed long ProShares Short VIX Short-Term Futures (SVXY):


The "right" way to play volatility...although it is very likely to print a lower high soon

The “right” way to play volatility…although it is very likely to print a lower high soon


Even the Australian dollar (FXA) versus the Japanese yen (JPY) has turned sharply upward. AUD/JPY bounced nicely off the psychologically important 100 level in what is starting to look like a hammer bottom that signals an end to the downward pressure. Good thing I used the opportunity to buy and did not jump on the bearish warning right away.


Keeping a close eye on developments with AUD/JPy as it could provide THE key signal for whether the overbought period is short-lived and bearish or long-lived and bullish

Keeping a close eye on developments with AUD/JPy as it could provide THE key signal for whether the overbought period is short-lived and bearish or long-lived and bullish


Charts of the day go to post-earnings Deere & Company (DE) and post analyst day Intel (INTC).

Deere & Company (DE) remains perfectly trapped between its 50DMA on the low side and its 200DMA on the high side. Earnings did not resolve the stalemate. In fact, it highlighted the stalemate by touching BOTH ends of the range on the day. DE now has my attention, and I am assuming a breakout, whether up or down, will likely be the start of a strong and sustained move in the given direction. Advantage is likely with the bulls given the 50DMA is now sloping upward.


Deere & Company (DE) is on the edge of what could (should) be a major breakout or breakdown

Deere & Company (DE) is on the edge of what could (should) be a major breakout or breakdown


Almost nothing says “bullish stock market” better than Intel (INTC) at or around 14 year highs. Absolutely amazing. ‘Nuff said.


A very bullish run from a post-earnings gap down

A very bullish run from a post-earnings gap down

It's a different Intel this time

It’s a different Intel this time


My strategy to trade INTC between earnings continues to work very well…except this time I bailed far too early!

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 SSO shares, long NFLX put spread

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