Weekly Technical Comments – “Oversold Bounce Only”

Apologies for the delay in posting this week’s technical comments.

The Swiss team stick to their call of last week that equity markets are deeply oversold and therefore a bounce should continue this week before more weakness resumes through June. They recommend selling SP500 levels around 1340 to 1350. Today cash reached 1335 so we are getting close.

The eurusd remains very unloved. She is running out of ‘runway’ to rally before equities resume their weakness and safe haven assets are bought again. The rest of this week remains a crucial period for the eurusd. She has a window to bounce but if she doesnt before equity sell levels are hit more euro weakness could well be forthcoming.

Here the report.

Weekly29-05

All the best

Rich

Weekly Technical Comments – “5 to 10 Session Bounce A Selling Opportunity”

The Swiss team confirm the near term capitulation that we saw last week. They expect a bounce here lasting between 5 and 10 sessions. They recommend selling strength with S&P 1250 and even 1210 as cyclical targets.

Its hard to disagree with their analysis on this occassion. Greek elections marked for the 17th June and the FOMC meet for two days on the 19th and 20th of June. Very conviniently the G20 meet also on the 18th and 19th of June 2012 in Mexico. ECB meet 20th June. Bank of England meet 22nd of June. If we turn back to 2009 the market bottoms did not co-incide with central bank monetary policy announcements. The bottom came well after the news as the market had momentum to the downside. If we see renewed downside momentum following this ‘bounce’ low could occur easily extend through the summer. Its worth remembering this bit of recent history before ‘leaping’ on news flow ahead of the technicals turning. Of course, assuming policy makers do act in June. Lastly, on a similar issue, the fund flow implications of their call for the top in the decade long bull run for the bunds is meaningful if correct and has serious positive fund flow implications, especially for equities.

All the best

Rich

Weekly22-05

The Inflationary Inflection Point Approaches

As markets tumble we have to ask the same question we have asked ourselves so many times before. Is the economy, once again, heading into a deflationary de-leveraging spiral?

The 10yr T-bond rates would answer this question with a resounding answer – yes!

Lipper fund flow data has continued to roll in month after month as if a recession where in full motion. There has been next to no investor appetite for pro risk assets during this post 2008 ‘recovery’. Here the latest Lipper report pdf.

lipper-flows-april.jpg

These negative fund flows as regards risk can also be seen in the consumer sentiment numbers that continue to be very weak.

The deflationists arguement that you cant push on a string is being repeated here. Consumers want to deleverage after a period of over consumption whereas their government is pushing them to re-leverage and take on risk. Although savings rates remain low in the US cash savings are being accumulated and staying as cash deposits.

 

The central bank monetizes debt and lowers interest rates to push capital holders out of cash and bonds lowering interest rates so that even a minimal positive return will be force risk takers to invest their capital. This is the theory but as we can see from the Lipper data capital holders continue to take year on  year negative returns in preference to risk taking.

Yield decompression continues in the S&P as earnings breakout to record levels and price earnings ratios continue their march downward.

Here a report released yesterday to me from a highly respected research co on S&P 400, 500 earnings. Historic and forward charts.

Yardeni-may-pdf

Earnings have risen, as you can see,  way beyond their 2008 highs. Many company’s balancesheets are much stronger now than they were in 2008 but many are worse as they continue to mop up toxic assets in the search for yield and in fullfilling central and local government’s nevr ending need for credit. Here the summary chart from the report.

This is strong stuff and given an accomdative central banks as well as proactive governments makes for a once in a decade investment opportunity especially given the consensus move out of equities into bonds and cash.

Indications at present are merely that some are seeing a continuation of this risk off world alongside higher inflation. We can deduce this from the TIPs (inflation adjusted bond chart). Here


“Timing is everything” as a famous comic once said. This is even more true in investing and trading. On this basis we can say the following paragraph with some certainty.

The developed world continues to see stressed balance sheets across her leveraged financial sectors. This is occurring as cash and bond deposits continue to grow but liabilities grow faster as governments continue to borrow at a faster rate than nominal inflation. Balance sheets are therefore worsening not improving. If this trend is not reversed very quickly another balance sheet solvency collapse will inevitably occur with the resulting severe deterioration in confidence and investment. Given unemployment levels, wages and public finances are close to their limits of democratic tolerance a collapse at this point may result in consequences that nobody in the system can anticipate. As the ratio of existing money on the slide lines (parked in cash and bonds) is so high the dilution effects of money printing will be low. In effect the inflation risks of ‘action’ by policy makers is at an extremely low point. The ‘game’ of money printing to encourage demand will end but not when the ratio of cash and bonds to new money required is so low. Only when this ratio gets completely out of step will the game truly be up.

The rational in this paragraph continues to motivate me towards blue chip, high yield stocks. The trade has become a contrarian trade and this is a good thing. It is not a crowded trade. The upside is significant. The data of other areas of the world where balance sheets became stressed and countries demanded money printing as a solution to their insolvency issues are instructive at this time, i would argue.

The downside is another complete collapse of the system. I therefore am limiting my leverage but allocating all possible cash and bond savings to yielding risk assets.

You pay your money to take your chance in life.

Weekly Technical Comments – “Short-Term Oversold Bounce” Before Selling Resumes

The Swiss team pointing to the AAII survey and the over sold indicators. (They dont pick up on the drop on bearish advisor sentiment as does Weinstien, Ive covered this on the forum). They are calling for a near term bounce in the next few sessions. The medium term technial weakness remains however so they are calling for the bounce to last no more than a few weeks before the cylical bear resumes. Here the report.

Weekly15-05

Weekly Technical Comment – Near Term Bounce in Equities and Commodities (Updated with brief macro update).

The Swiss team sticking to their medium term call of another wave down but near term they are calling for a multi week rally here this week. They like risk assets ie the CRB as well AUDUSD and believe a new high is to come for some EM indexes. Medium term they stick to their call for a mid summer 10% correction in indexes. As a side comment they site a bottom in the brokers sector is likely here and now. The implications are for some eurusd strength here. They dont mention the pms specifically but i some speculative entries here on gdx, sil, slv and gld looks fine to me. (I would implement stops on the entries but look to run them for as long as the rally lasts).  A good valuable report picking up the major asset classes and index sectors.

Rich

Weekly24-04

p.s. A general comment on the 2012 market thus far. A narrow push up in stocks with a continuation of the cyclical bear in commodities has made 2012 another challenging year in spite of the headline rise in many equity indexes. Dow +6% & S&P500 + 8%. Money flow is turning positive to equities but its slow stuff. Many professional speculators have generally been left behind by under performing the rise in overall indexes as the majority of stocks miss out on the rally. It has been an index and sector specialist market thus far in 2012. Fx indexs has not been unkind and this has supported my own personal performance this last 4 months or so.

Personally, im only marginally out performing the US indexes. I’m strongly out performing the Euro indexes. Im coming in at +7.5% inc divis, so far.  This is far from perfect but given the moves in the miners, commodities, euro indexes and the euro itself it could have been alot worse. There are strong divis to come so should the indexes remain at these levels by the end of 2012 its hard not to predict a double digit gain for 2012. But we wait and see.. we must take whats on offer. I have no expectation therefore.

On the macro front we have all sorts of leading economic indicators in the US pulling up short once again. We are still waiting for some sort of momentum in economic nos to sustain from housing to consumer confidence to loan growth etc. All the nos continue to roll through marginally positive though totally lacking any real convinction. Its a very weak recovery this at present. These growth levels are insufficient to support the continued growth in debt, etc. 2013, assuming obama is re elected, promises a huge raft of tax increases in the US. This would totally destroy any positive private sector indicator positive growth story. Therefore the clock is ticking on the economic nos momentum issue. As Krugman says “now is a perfect time for another bubble”. We can almost gaurantee that another will come soon enough as this is the age of bubble economics.

Burdened by huge public welfare systems bubble booms are the only booms that seem likely here. Bubbles will be created by a combination of fiscal incentives as well as liquidity injections through the private sector banking system or the central banking system.  These booms can be very significant so their sustainability or otherwise should matter not to us here. We must, as Soros says, “buy a bubble when we see starting to form”. In the age of endless liquidity they are the new wealth creation mechanism. They are the balance sheet quick fix to endless debt creation.

Unfortunely, of course, bubbles merely pass wealth from savers to insiders and a few nimble speculators.  Overall capital will be destroyed in the process as false booms are created through fiscal and monetary means that misallocate capital and labour to areas of the economy that would otherwise be ignored. We must be patient for these coming booms. They will come soon as otherwise debt to gdp levels will get seriously out of step. So seriosly that a total systemic collapse will become a real threat once again. In this intervensionist age we can suppose this collapse is highly unlikely so be ready for plenty of bubbles to come care of governments and central bankers in close co-operation.

Rich

 

Weekly Technical Comments – “Below S&P 1388 invites a move to 1340”

The Swiss team assert that the bear is likely to push this lower and that a continuation to 1340 is the path of least resistance. They sight 1388 as a key level s&p500.  Take note that on today’s sharp spike up we are back over 1388 as i type. If we do push on here Nasdaq appears to offer much.

Rich

Weekly17-04

Weekly International Economic Indicators Commentary (Care of WF).

A wide ranging and therefore good report from WF today from their weekly international economic commentary. I therefore post it up for weekend reading.

The quick summary, the data appears to be softening from Bejing to New York to London. I’m starting to get that all too familiar feeling of “deja vu” here and now. 2010 and 2011 were both sell in may and come back in sept years. 2012 is starting to feel very much the same way as we stand here today.

The summer months are often the time to rest up and reduce the number of trades. Only high momentum (monetary stimulated) markets (as in 2009) are really worth actively trading. We are still in the pre election window in US whereby the Fed could act. The monetary run way is fast diminishing however and the ‘self sustaining’ evidence is starting to look a bit thread bear once again.

Here the WF weekly economic commentary.

WF-Weekly-Economic-Comments04132012

And once again, re the specifics of inflation, the UK and US central banks are on the wrong side of the cpi forecast.. ie inflation is higher than they forecast (as it consistently always is). Inflation almost never surprises central banks to the downside it seems. To ignore this piece of evidence is to ignore one of the key indicators in the market. I’m not sure this makes QE3 less likely. I suspect Ben secretly strongly desires some positive inflation higher than it is as he well knows it will erode the US’s debts.

Higher than forecast cpi nos (even with the magical seasonal adjustments as well as subsitution and hedonically adjusted magic dust) are what the dc ordered. A very neo Keynsian doctor that is.

WF-CPI

All the best and have a great weekend guys

Rich

The Case for Global Equities – GS Report

I’ve been making the case for global equities since the 2008/9 financial crisis. Developed world equities have come a long way, more than doubling, since the 2009 lows but does this make them expensive here? Not in my and many other’s opinion (inc GS’s as below). The same recent positive gains cannot be said for many emerging market equity indexes. (Many EM indexes have underperformed over the same period).

There do seem to be good fundamental reasons for this recent equity strength. World wide corporate earnings are at record high levels, long term refinancing rates are at record lows, the positive spread of corporate profits to fixed income is at a high water mark and the ranks of the world wide middle classes are growing like never before.

Against all these positives we have the continued issues of western over indebtedness of state and household which has contributed to equities under performing their growth in earnings. Equities are priced on assumptions of negative growth from the continued debt problems in the western markets. Here below a chart from the GS report..

To me, the important wild cards here are central bank monetization programs and how these actions feed into money flows. Capital has flowed into debt markets for the last thirty years. If this private capital trend is close to her turning point (debt monetization inevitably will drive private capital away from bonds) this will have multi decade capital flow implication. Whereby equities will be the beneficiary.

Whether equities out perform inflation in the coming years is a different question. Nonetheless the question of whether they out perform cash and bonds is a high probability positive bet, in my opinion. And a bet, therefore, many will take at volume in the coming years.

Here the GS Strat report from last week. GS-Case for Equities-March-2012

All the best

Rich