Stock market analysis and commentary from a trader's perspective

Wednesday, August 3, 2016

Notes From Vacation 2

Over 2 trillion yen ($19.8 billion) of Japanese bonds sold in July are now below par. Yields damn near went positive yesterday. The yen almost broke 100.

Nothing could bring down the central bank shell game faster than Japan, so keep an eye on it.

Source: tradingeconomics.com
Meanwhile, keep an eye on the S&P 500:


The fact that rolling over at an internal trend line from 2013 and a 61.8% Fib extension does not help the bullish case.

The fact that the Dow is below its May 2015 18,351.36 high for the 2nd day in a row is also troublesome.

A failed breakout could quickly mean Turtle Soup.

At best, price may now suggest yet another rising wedge much like the previous one that topped in May 2015.

It may, or may soon, put in a 3 of a 1-2-3-4-5 structure. If so the current decline could morph into a wave 4 with a 5th into the fall.

Using that word on purpose since this scenario is well supported by social mood:

Bullish Jim Paulsen's "cascade of change" accidental subtext.

Katy Perry's dark hit single "Rise."

Marketwatch recently offering "How to get started buying stocks."

Netflix suffering a decimation of its customer base after a $2/mo. rate hike.

Bubba Watson's new jetpack.

The $200 hot dog with edible gold flakes.

A poop-themed dessert cafe in Toronto.

Massachusetts' statewide median home price is the highest ever while homeownership rates in the U.S. drop to the lowest since 1965.

Nationwide classes teaching "How to get started flipping houses."

Virgin Galactic just awarded its FAA clearance to test its tourist spaceship.

I could go on and on but you get the point.

Monday, July 25, 2016

Notes From Vacation

It's been quite a few weeks. Vacation is great. And the amount of hidden data nuggets I've uncovered while taking it easy has been astounding.

Deutsche Bank noted that on an adjusted basis, using the historically low level of short rates, "the yield curve has been inverted for some time," and that the bond market is just 40bps from an implied recession probability of 70% which has signaled the last two recessions.

BofA also noted the same yield curve inversion when adjusting for the trillions of Fed liquidity support.

BofA also noted that the $3 trillion pension industry is running a $500 billion funding gap which could cause entire pensions to be offloaded from corporate balance sheets to insurance companies. Wondering if insurance companies could be a Big Short if the bond market is approaching a generational peak.

Meanwhile, Wells Capital Management's perennial bull Jim Paulsen revealed some accidental subtext when he explained his call for more upside, noting that a "cascade of change is coming." Since accidental subtext is subconscious communication at odds with intent, maybe we should pay attention to the cascade part.

Elsewhere, T11 Capital Management's June 2016 Client Letter is a perfect example of vehement trend extrapolation.

"Billionaires are only too eager to tell us all how peasantry awaits any individual who trusts in the global economy to provide any form of prosperity going forward. Soros, Druckenmiller, Rogers, Icahn, Bass and Grantham to name a few . . . It's not difficult to figure out where we are currently in the greed/fear cycle. Portfolios should be positioned accordingly."

The vehement fund manager does not stop there.

"Predicting bear markets on Wall Street is the sport of invalids. Unfortunately, the present condition of the public makes invalids the majority population on Wall Street. It shouldn't be a surprise then that a majority of investor's time is now occupied by fetishizing bear markets."

No mention of the many years of extreme bullish sentiment since 2000, or of the current laundry list of generational valuation metrics in the 99th percentile.

"The attempt to gain alpha from either protecting against a bear market through various hedges or getting net short at some point in time is a waste of energy and resources. The primary reason is because in 1915, 101 years ago, the Dow was at 55. It is currently at roughly 17,000. Markets go up over time."

A waste of resources . . . Markets go up . . .

"If somehow we were in some type of reverse parallel, holographic reality where financial markets consistently went down over the past 101 years, then I would be a total advocate of shorting stocks, without worry for when they will go up. Point being that when the natural forces of time work in the outright favor or absolutely against something, they shouldn't be argued with, debated or attempted to be timed for fear that nature will reverse itself based on fluctuating, random sets of data that are presented on a daily basis."

In other words, don't argue with the trend, don't debate it, don't attempt to time it. Just close your eyes and ride it. The type of thinking that indicates that the trend is in danger of being a victim of its own success.

As if to echo such sentiment, a recent Marketwatch headline offered "How To Get Started Buying Stocks."

And so we transition to the current state of social mood land, where an astounding number of clues are there for the taking.

Insanity seems to be everywhere.

Tesla's Insane, Magnificent New Master Plan, Slate.com, July 21, 2016

How You Can Book Etihad’s Insane First-Class “Apartments” With Miles, Bloomberg, July 20, 2016

An ‘insane’ number of catalysts are poised to roil vulnerable markets this week, Marketwatch.com, July 25, 2016

In ridiculous news, used Porsche 911 Rs are selling for almost $1 million. That is an insane 7x markup over the original MSRP of $186K. TheDrive.com, July 22, 2016

Nvidia’s new Titan X is the most insane graphics card ever made, Stuff.com, July 24, 2016

What's even more insane? Gold is for eating again.

Just like Japan's lust for edible gold flakes on sushi in 1988 just before the Nikkei's all-time high of 39,000, in 2016 it's the humble hot dog's turn.


Social mood actually seems to have gone stratospheric.

Golf, the ultimate bull market sport according to ANZ's chief investment officer and longtime socionomist Kevin Armstrong, just got a crazy new James Bond toy.


Even the New York Times embraced the term.


Music wise, back in gloomy 1979, just before the start of the epic bull run in stocks and bonds, musician Herb Alpert topped the charts with an upbeat jazz-disco instrumental entitled "Rise."

In 2016, we've come full circle with Katy Perry's new single "Rise" about striving to overcome adversity, and which has become the anthem for the Rio Olympics "ravaged by crisis" according to CNN.


The dark lyrics to Rise sound eerily like a market propped up by central banks:

When, when the fire's at my feet again
And the vultures all start circling
They're whispering, "you're out of time."
But still, I rise
This is no mistake, no accident
When you think the final nail is in; think again
Don't be surprised, I will still rise

While history often rhymes, another 37 years of uptrend seem wishful.

Finally, a bit of anecdotal news echoing 2006-2007 when my parents couldn't get anyone to do small jobs on their house: it's happening all over again. It's even happening in Puerto Rico where there's supposed to be a brewing humanitarian crisis.

Phone calls are not returned. Jobs are left unfinished. No one wants to do the little stuff while larger projects are available in quantity.

Luckily for my parents, I work for beer.




Friday, July 1, 2016

Vacation

Taking a break from the screens until late August while on vacation. Will post periodically with short paragraphs like this one. The markets are once again a Sea Of Green...except for E-mini futures at the moment. Central banks continue to talk interest rate cuts within months (BOE) and loosening the rules for bond purchases (ECB) and might need a bigger boat (BOJ) while St Louis Fed president Bullard boldly proclaimed that Brexit may end up having no impact on the U.S. economy. That may be true, but many other things may. For now anyway, bias is still higher ahead of Independence Day weekend, but next week could be interesting. All that bid beneath treasuries has only managed to get the 30-year above it recent highs while the rest of the curve wallows. JPY and CHF continue to say hey, pay attention. 2113.32 remains the key swing point for the S&P. I continue to hold XIV and would like to add on any further correction, and hope to add to the VIX calls early next week. Stay tuned for the 6th edition of The Socionomic Implications Of September Vogue in early September. Best of luck in the markets and life.

Classic 80s by The Go-Go's. Love it

Thursday, June 30, 2016

Thursday -- PBoC, IMF Outs DB, Soros, Bullard, VIX, Holidays

S&P E-mini Futures:
Still hovering up, up, up overnight.

News:
Even the PBoC couldn't knock out the markets last night when it was rumored and promptly denied that it would further devalue the yuan to 6.80. With the upcoming July 4th Independence Day holiday in the USA, I wouldn't put it past China to follow through on it while our markets are closed and everyone is watching Wimbledon (brilliant scheduling by the Brits).

More hope. Mitsushige Akino, a Tokyo- based executive officer at Ichiyoshi Asset Management, commented to Bloomberg by phone. “There’s hope for policy measures globally, not just in Japan, so that’s supporting markets”

Bank watch list: "Among the G-SIBs (globally systemically important banks), Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse," the IMF said in its Financial Sector Assessment Program, via Marketwatch.com

George Soros told the European Parliament in Brussels to be more like Ben if it wants to reverse the deflationary trends that are already prevalent throughout the EZ, saying that former Federal Reserve Governor Ben Bernanke had the “right approach" during the financial crisis.

We know what needs to be done," he added. Hint, hint.

Except that *what's been done* has only made assets go higher, but has done little to heal underlying imbalances.

Warning. St. Louis Fed president Bullard speaks in London at 3:15pm EDT. Seems to be the Fed's loose cannon of choice.

FX:
JPY & CHF stronger, AUD & CAD weaker. USD firm. Shaping up for an interesting day, possibly Risk Off, or more probably, a little risk off the the table ahead of the long weekend after a huge bounce.

Treasuries:
Mammoth overnight volume in US 10-year notes. Perhaps a signal that the move to higher highs in treasuries is coming soon. After that, things could get interesting.

Regarding JGBs, “Only God knows how far yields will fall,” Souichi Takeyama, a rates strategist at SMBC Nikko Securities Inc. in Tokyo, told Bloomberg.

In other words, sentiment is extreme.

But then there was this JGB thing, from Ransquawk"The latest securities transaction figures showed foreign investors rapidly increasing their selling of Japanese bonds in the prior week."

Scary.

Energy:
WTI crude giving back some recent gains. NG looks ready for still more highs.

Metals:
Gold and platinum down, while silver, palladium, and copper rally.

S&P Outlook:
E-mini futures blew doors on 2064.75 and closed above it.

The S&P cash closed above the 61.8% retracement of 2069.95.

Volatility has fallen over 40% from its Brexit high. Bot some VIX 25 August calls to hedge XIV which shot to the moon this week.

I rate the pattern and structure as bullish ultimately, but see room for more exploration lower in the near to medium term. It doesn't feel like the recent fireworks are simply "one and done."

But for now we should expect End Of Month and pre-holiday bias to be higher, as it usually is.

Next week could be a whole different story though.

Speaking of holidays, tomorrow is my last day for a while. Taking a long holiday to visit my family and friends back in New England. So tomorrow's post will be it for a bit.


Wednesday, June 29, 2016

Wednesday -- Depositors Or Junior Bondholders, Rising Delinquency Rates

S&P E-mini Futures:
Up, up, up.

News:
It might be time to have a discussion with your bank and ask them who you are. Are you a depositor, an uninsured depositor, or a junior bondholder?

While Brexit hysteria grabs attention, there is a brewing banking crisis in Italy that may make such a conversation important no matter where you live.

What follows is a direct quote from Zero Hedge, something I don't ordinarily do because I use ZH only as an information aggregator from other sources. This one is more fact than opinion, however:

"The banking squeeze has become politically explosive in Italy after thousands of small depositors were wiped out at four regional banks late last year. They were classified as junior bondholders, even though most of them were just ordinary savers who did not realize what was being done with their money."

On Monday, Italy announced plans to bailout three banks with funds totaling approximately €40 billion. Germany just escalated things.


Given the recent performance of European banks, especially Germany's own Deutsche Bank, the UK referendum may turn out to be the match that ignited the fire.

What fire.

The one brought on by rising delinquency rates on bank loans.


While the Fed focuses only on the headline number -- the delinquency rate on all loans (which decreased in the first quarter of 2016) -- it seems to overlook the underlying information that makes up the headline number.

These are delinquency rates on commercial and industrial loans, delinquencies on all loans and leases, and charge-off rates on commercial and industrial loans across US commercial banks -- all of which are increasing at rates not seen since 2008.

It's even worse in Europe, where non-performing debt instruments have been steadily rising since 2010, meaning the Greek crisis never really ended.

The key takeaway in the above link: "Italian banks in particular are suffering from an unbelievably high delinquency rate."

As much as the EU would like us to believe, it's not all about the UK referendum. It could soon be about whether you are a depositor or a little bondholder.

FX:
GBP continues to rally. AUD & CAD strength. JPY hovering flat, but CHF showing strength. EUR stronger, while USD gives back a bit from its violent gap up.

Treasuries:
Continuing a low volume pullback on the way to higher prices and lower yields.

Energy:
WTI crude continues to increase altitude from its recent low. NG extended its impulse to yet another rally high.

Metals:
Gold, silver, platinum, and palladium higher. Copper sitting it out.

S&P Outlook:
Watching 2064.75 on the E-mini futures. Above that would mean a 3-wave decline from the recent pre-UK referendum highs -- a potentially bullish set up.

Of course the market could still correct lower, but the resolution from whatever lower level that was tested would likely be higher highs, and quite possibly a retest of 2134.72.

The cash S&P does not have the same structure. Since it represents the "real" market, unfettered by leverage and thin overnight trading, or suddenly being pushed around by tens of thousands of contracts at opportune times, it remains the one I watch most (levels of which are always bolded, while E-mini levels are never bolded). It is not traded, but is a mathematical number of all 500 issues calculated in real time, and thus is often makes a "truer" chart.

At present, though, the S&P chart is a bit vague, which is why I'm using the E-mini chart for now.


Tuesday, June 28, 2016

Tuesday -- Hope Springs

S&P E-mini Futures:
Up sharply from yesterday's close.

News:
Sea Of Green™ ...on hope, not fundamentals.

Hope that central banks will roll out a coordinated policy response, hope that Cameron's meeting in Brussels will finalize the UK's exit from the EU, hope that Italian banks will get a bailout, and hope that Japan will embark on more stimulus measures.

No talk of stronger earnings, revenues, or sales.  Just hope for more intervention.


Would love to see global voter alignment to revoke the charter of central banks.

Oh, former Fed chairman Alan Greenspan wants a return to the gold standard.

Don't be fooled. If the dollar were to be re-pegged to the price of gold, it could be devalued overnight, yet again, at will, just as Roosevelt's Gold Reserve Act of 1934 devalued the dollar by 41% when the price of gold was "adjusted" from $20.67 per ounce of gold to $35 per ounce.

FX:
GBP higher, USD lower, AUD higher, CAD lower, JPY & CHF weaker. What a day so far.

Treasuries:
Volume is contracting as treasuries consolidate at highs. If the next move has still less volume, may look at the short side.

Energy:
WTI crude made a new swing low last night, but did so looking choppy. NG ripping to new rally highs. Volume drying up.

Metals:
Sea Of Green™ in equities putting a dent in metals except for copper and palladium thus far.

S&P Outlook:
Some cool voodoo. Price is bouncing from an exact 1:1 price/time match from the February lows which backtested an internal trend line and closed at a perfect 38% retracement of the rally from the February lows. Sometimes market create beautiful symmetry.


While yesterday's chart is still possible (showing a possible wave correction before new all-time highs), not forgetting this one due to the amount of hope in the air.


Yesterday's chart reposted for reference. Today could be wave iv, or possibly the wave 2 low.


Monday, June 27, 2016

Monday -- Hanging Chads, BIS Warns, Boris REBOOTS

S&P E-mini Futures:
Back to Prince territory, yet looking firmer.

News:
Seems the world may experience what Americans went through during the infamous Florida Recount of the 2000 election.


Seems the Brexit vote may not matter until Article 50 of the Lisbon Treaty is triggered, and it seems that Prime Minister Cameron is dragging his heels.

Article 50 states the following:

1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.

2. A Member State which decides to withdraw shall notify the European Council of its intention.

Simple enough. Easy to delay. Yet supposedly the EU will not put up with a delay, but that could only be "publicly."

Focusing on Brexit therefore will probably only court confusion.

Better still to focus on central banks. And the central bank for central banks: the BIS in Basel, Switzerland.

The BIS has just released its 86th Annual Report, and once again contains a stark warning courtesy of Bloomberg's summation:


“Monetary policy is running out of room for maneuver,” said Hyun Song Shin, head of research at the BIS, in an interview. “It is not clear how much further stimulus of the real economy can be achieved using monetary-policy tools alone without inviting unwanted distortions.”

God bless London Mayor Boris Johnson, though. He gave The Socionomic Implications Of September Vogue: 2014 its long awaited REBOOT.

In an op-ed Sunday evening, he wrote:

"There is every cause for optimism; a Britain rebooted, reset, renewed and able to engage with the whole world. "

Cheers Boris. Cheers Britain.

FX:
USD stronger, JPY stronger, GBP new lows probing 1.32 (started building long position in pre market). CHF weaker, along with commodity currencies.

Nikkei up over 2% last night on fresh stimulus measures in the pipeline according to Shinzo Abe's wishes (who didn't read the BIS report).

Treasuries:
Feels like everyone's on the same bullish side of the boat. HSBC Holdings Plc’s head of fixed-income research Steven Major says "we’ll have low and negative rates for a very long period of time.”

Not so sure, especially when BIS is staring to sound downright scary, with some of its similar themes echoed in this Bloomberg article:


Energy:
WTI crude down in a choppy decline. NG possible 5-waves down, 3-up pattern which could be near-term bearish after its long rally.

Metals:
Metals higher across the board.

S&P Outlook:
The S&P cash has opened down (at a 1:1 Fib extension in the 2016 area) as futures retest the overnight Prince post-Brexit lows at 1999. Added more XIV in pre market (started adding Friday).

There is a possible 161.8% Fib extension target at 1980 that could shift the tone near term if hit.

Posted a possible bullish chart on Friday intraday that has just been negated due to 2025.91 breaking.

Now thinking a test of the 2000 level or possibly 1950-1980 could see a wave 2 low.

Or a developing impulse to even lower levels. Exciting times.