Tuesday, January 31, 2012

Copper and Euro

On Jan 18, a few days before China shut down for one week, I posted copper and euro charts.
Let's revisit those charts. Both ran into their respective resistance.
Perhaps it is time to look for shorts somewhere here...

click on charts to enlarge

Weak EconoData

Warning shots fired by some weak U.S. econodata (for a few weeks now) were correct. We are getting more of that this morning. Housing, Chicago PMI, and CB consumer confidence - all disappointed. Yesterday's weak consumer spending number confirms fatigued U.S. consumer.

One has to wonder what ISMs will come in like tomorrow and on Fri. I also would like to see productivity report and chain store comps on Thu. NFP is out on Fri. as well (Chicago PMI employment component was down 4.5 @ 54.7).

SPX short idea may be working for a while. Greek PSI deal could be a brief bounce to short into again. "Golden cross" is another nonsense negative against this trade. Biggest obstacle - ECB/Fed's sea of liquidity.

Good luck with your trading!

Sunday, January 29, 2012

Trading Thoughts for Week of January 30

Central bankers have once again decided to take matters into their own hands. They are getting ready to print more money, and it seems that there will be no end in sight. It is clear that they are afraid to let equities decline any further.

Did they know early?

I continue to think that RMBS-targeted QE3 is not a bad idea, because it is going to help ailing U.S. housing market. But what Fed did on Jan 25 was not that at all. FOMC further extended the "extended period of time" of "exceptionally low" rates, but more importantly, gave a grim economic outlook.
Fed chairman continued to provide more downbeat assessment at subsequent press conference, asserting that economy has not improved that much, to the chagrin of some arguing reporters.

Only two days later, preliminary 4Q2011 GDP report has revealed the reason for Fed's worries. If you do not like digging into economic numbers, I will provide a few highlights. Underlying data was much weaker than headline number (which slightly missed the expectations): inventory build accounted for 69.3% of total GDP growth, because of that real final GDP sales were the lowest since 1Q2011 and grew at only 0.8%, govt spending contracted severely by 7.2%.
Do you think a little birdy flew an early message to FOMC, just in time for their meeting on Tue-Wed? Or has Fed chairman developed an ability to see through walls, after totally missing Financial Armageddon, resulting from the "contained" sub-prime crisis? Everyone was shocked by FOMC's dovish statement - Fed obviously knew. Their interest rate decision cushioned the ultimate outcome of disappointing 4Q GDP.

Fighting this sea of liquidity is considered (by many) to be a money-losing proposition, but it really felt right this time, at this trendline resistance on SPX. Perhaps one has to take profit on this trade more often and earlier than usual, because it is so against the trend. This is not a suicide mission though, as the stop is already at break-even. There is no strong conviction on charts to support this trade. Daily and even weekly Stoch is now embedded in buy mode. Should they disembed and provide a further sell signal, adding to position would be prudent. One has to remember that in U.S. presidential election year equities typically oscillate the flat line by 5%, until it is clear who wins. At 1333, on Jan 26, SPX was up 6% YTD.

Across the pond, more central bank madness...

Things are getting worse in Europe, economically speaking.

In UK preliminary 4Q2011 GDP contracted 0.2% (worse than expected). BOE may need to do another round of QE to reignite the economy. That will put pressure on GBP.

In Spain unemployment has risen to mind-boggling 22.8%. This is prompting Spanish govt to ask EU for some easing of austerity measures (according to some officials).

The worst development may perhaps be occurring in Portugal. Its debt is now rated junk, unemployment is projected to reach 14.2% by 2013, GDP contraction forecast for this year has deteriorated to -3.2%, and debt to GDP will surpass 100% in 2012.
So it looks like market has found its new victim - Portugal's 10 Yr Bond Yield closed above 15% on Friday, and CDS blew out to historic highs.

But most of the news above are no worry to heroic ECB, which is now flooding EU banks with cheap liquidity. Another round of LTRO is scheduled for February, and rumors are that there will be more takers at that marvelous handout party. Banks will bring their worthless collateral - sovereign bonds of insolvent EZ govts, and get all the euros they need at 1%. Folks, there is one big problem with all of that - money will end up as deposits back at ECB or even worse - go into the same sovereign bonds of insolvent EZ govts, which are yielding a hefty carry over LTRO rate. What a nice ponzi scheme, Bernie would be proud!
Of course, ECB will make us believe that it is not so, and that this refinancing operation will improve lending in EZ, therefore returning the growth to recession-bound region. We will see, I say. In the meantime, loans to consumers and businesses in Euro Area have contracted the most on record in December of 2011.
Mr. Draghi (ECB president) himself said it is not certain that LTRO has resulted in any new lending by participating banks. You are correct sir, but we will give it some time, nonetheless. Somehow I think that LTRO is going to end up just like TARP in U.S.
All LTRO will do is alleviate bank liquidity problems, leaving the sovereign insolvency well in effect. It is only through new private lending, which will result in pickup of growth, that Eurozone can solve its debt crisis.

Due to these continuing negative developments, it is hard to believe that current euro rally is anything more than just a retrace in overall downtrend. Bears want to think that Wave 4 should be ending soon and a retest of lows will ensue. Market though is a discounting mechanism, with much of the bad news seemingly already priced in. The newly reported short interest, largest ever on record, may cause short covering last longer. Once this retrace is over, wave 5 down should begin and prevailing downtrend may continue. But it is hard to call for much lower levels below 1.2625 until monthly symmetrical triangle is broken on closing basis. With two trading days left in January, it looks like we would have to wait for February's close to tell us what happens on that particular front (chart below).

Friday, January 27, 2012

Gasoline Futures are on the move, again!

On Dec 29 I filled my gas tank at just below $3 per gallon. I immediately thought that I would not see that price for a long time.

Today RBOB futures have reached 5-month high, on supply worries due to various refinery troubles and closures.

Technicals are confirming a possible move to $4 in the next few months. This will not bode well for U.S. GDP, which is 70% comprised of consumer spending.

click on chart to enlarge

Thursday, January 26, 2012

GOOG Trade - Part II: Bounce and Sell-off Again

Google is known for gapping after every earnings report. This phenomenon can be attributed to the fact that company does not provide any guidance. Analysts and traders end up guessing the numbers wrong, resulting in violent reaction.

On January 9th I was concerned about GOOG missing Q4 earnings, due to the price action. It did...

Price gapped down hard and continued below. It is now almost at laminate support of 200 dma and two gap fills. I expect a bounce in that area +/- 5 points. Subsequent rally to low 600 level will be met with overhead supply. I expect another sell-off to start there. It will send the price down to the low 500 level to fill more open gaps and pull back to long-term trendline.

Above scenario is depicted in the following chart. Stunning resemblance with prior sell-off in the beginning of the last year is highlighted.


click on chart to enlarge

Wednesday, January 25, 2012

SPX is at resistance

Fed has given the "risk on" trade a green light today. Rates are to stay low forever...

I am not bullish though, due to Fed's downbeat outlook on U.S. economy. Why should one be buying S&P 500, which is already up 5.5% YTD, when in today's statement FOMC said: "growth in business fixed investment has slowed, and the housing sector remains depressed"?

click on chart to enlarge

Tuesday, January 24, 2012

Charting AAPL - Part II: Time to Sell

On Dec 22 I said that AAPL may reach $450 - 460 at the top of weekly channel. Well, it is at $452 in afterhours trading as I type (at 5:40 pm est.)

At this time I feel that trade objective has been met, and if AAPL opens between $450 and 460 tomorrow morning, it will run into upper trendline resistance and may start its pullback to the bottom of weekly channel.

Those who are long may want to sell some of their position and move the stop on the rest to just below the bottom of weekly channel. Congrats!!
Some brave souls may initiate a short at 450 - 460 level.
click on chart to enlarge

DAX Futures Trade Idea

click on chart to enlarge

Sunday, January 22, 2012

Trading Thoughts for Week of January 23

Equity rally is long in the tooth. I think that longs need to prepare to bail and shorts should be ready to go to work very soon, even though there is nothing on the charts that says it is time to do so, yet.
Here are my technical and fundamental reasons for being cautious:

1. SPX is overbought. This can continue as long as daily stoch is in embedded mode (and it currently is). It has traded straight up in rising wedge (bearish reversal pattern) since 12/20, with no meaningful pullbacks. As the matter of fact, there have been no closes below 8 ema on daily since then. Once the gaps above get filled, there are 6 gaps on SPX futures below current level to shoot for, all the way down to 1153. When weakness develops, many longs will bail and shorts will initiate new  positions. Have to wait for a signal!!

2. Increased dissemination of bull(ishness) by fund managers, appearing on business alphabet soup network, about how "everyone is missing the train" - is ludicrous and contrarian in nature. They sing the same song over and over: "stay invested", "you can't time the market",  "don't fight the Fed", "stocks are undervalued". S&P 500 earnings are projected to be roughly $100 per share this year. Apply a 13 P/E multiple to that - you get 1300 for SPX. Let's assume the best case scenario -  $105 (EPS) x 13 (P/E) = 1365. So we go up another 50 points, and then what? S&P 500 is at or just slightly below its fair value, considering U.S. GDP projected growth of 2 - 3% this year. What train are we missing? Train to nowhere...

3. Same fund managers say that "market deserves a higher multiple". I am tired of this argument, and do not get their main thesis behind it - "interest rates are at historic lows". There are many reasons for rates to stay this low, the main being that bond market does not believe liquidity-driven recovery in equities. Stocks do not trade in a vacuum. Expansion of P/E multiple can not happen until possible external macro shocks have been removed, some of which are:

a) Greek debt haircut talks could collapse, Spanish and Italian bond yields could spike to unsustainable levels - resulting in EU debt crisis spiraling out of control.
b) Eurozone recession could be deeper and last longer - resulting in much lower earnings by S&P 500 multinationals.
c) China could slow down tremendously - thus pulling the entire world economy down with it.
d) U.S. GDP could be revised downward due to that world-wide economic slowdown.

If that worrisome cocktail is not enough, let's add a few more important developments:

e) fresh Portugal default fears, as that country's debt is now rated junk by all three main credit rating agencies.
f) Iran's sabre-rattling in Strait of Hormuz threatening to block a flow of crude oil.
g) Absolutely no clarity on GOP candidate yet (with Santorum and Gingrich dealing a blow to Romney in primaries), not even talking about who will win U.S. presidential election in November.

Way too many uncertainties for market to advance without a meaningful pullback.
Taking all of the above into consideration, combined with the fact that SPX is up 22% from October 4th low, I am staying flat equities now and will be ready to short on a signal.

Thursday, January 19, 2012

Is Chinese government making a yummy fudge?

How do you keep your industrial production and GDP growing at 12.8% and 8.9% y/y (respectively), when you have an export-driven economy and two of your biggest export customers are canceling their orders? You fudge the numbers!!!

Wednesday, January 18, 2012

Euro, Copper, and China

It looks like QE3 will come from Far East (well, sort of). Rumor is that capital requirements for Chinese lenders are about to be relaxed. But has this been anticipated? Chinese stock market is up 6% from Jan 5th low. This development may already be priced in.
I understand, govt has to reassure investors before one-week shutdown for Chinese New Year, that all will be well in Big Panda Land. After all, it is supposed to be a happy holiday, and a very special Black Water Dragon year. Let's hope that another very rare black water inhabitant does not show up in 2012...

I am tracking a few scenarios in Euro and Copper. Just wanted to share them with you.
In both cases there is an upside bias, but it looks like a retrace within overall downtrend, which is to resume shortly. Perhaps we may see that reversal during Chinese New Year one week vacation.

click on charts to enlarge

S&P 500 Futures at crossroads. Who will win - bulls or bears?

Stock market has dueling scenarios developing. It is hard to predict exactly what it does at this juncture. But should the market move, we have gaps below and above to use as targets on ES.

click on chart to enlarge

Monday, January 16, 2012

Market Thoughts Week of Jan 16

With a lot of issues to discuss, this will be a slightly longer post.

To decouple, or not to decouple? That is NOT the question.
Simply put, EU-27 is the largest economy on the planet and is one of our largest trading partners. S&P 500, mostly through U.S. multinationals, gets more than 20% of its earnings from Europe. It is widely known that Eurozone is heading into recession. This will reduce S&P 500 earnings through multinationals. Further weight will be put on those companies' profits by higher dollar (through weaker euro).
Many U.S. banks have operations in Europe. If defaults occur (Greece comes to mind), there is going be a contagion across the entire financial system. Jamie Dimon (JPM's CEO) just disclosed that his bank has $15B exposure to PIIGS and could lose $5B of that. Europe accounted for 50% of total U.S. global foreign direct investment in 2010.
How can these facts be decoupled from U.S.? This decoupling talk is ludicrous!

S&P EU sovereign credit downgrades finally came.
Friday the 13th and MLK long weekend was the worst time to do this. But equity markets handled it fairly well. One just can't be too bearish equities when you see a respectable strength like this. Be careful and chose your entries wisely (on this a little later).
The most important downgrade for me was Italy. With two-notch downgrade it is now just three notches above junk. Can you say Greek debt multiplied by 5.5? Once Italy's credit rating is junk, it will be shut out of the bond market. ESM and EFSF together would not save Italy from default then.
So who will S&P downgrade next? My guess is another deeply indebted country in EU. Perhaps Mr. Baroin (French Fin Min) gave S&P their next downgrade idea, when he asked in dismay why UK's rating is still AAA?

Will UK decouple from EU too? Oh wait, it is in EU. Long-forgotten is Mr. Cameron's stance on abstaining from new "fiscal compact". Check out GBP chart, it is not looking too good lately.

click on chart to enlarge

A warning shot?
On Thu we got some weak U.S. Econodata. Dec retail sales disappointed. I warned about this right after Thanksgiving, as XRT was not able to take out early Nov highs even with best Black Friday sales ever. I drove around every weekend after Thanksgiving, and my local mall traffic was down ever since. Combine this with last week's less than expected Non-Mfg ISM, and you have a weaker consumer. I am worried now!
Weekly jobless claims shot up. Are we to be surprised? Temp workers are being let go in droves, as holiday shopping season is over. We will have to see if the trend develops. Also, (very quietly) Philly Fed was revised down to 6.8 from 10.3 last week. Hmmm, nobody noticed? We get Jan # on Thu of this week, watch it...

click on chart to enlarge

Doves are flying high.
Late last year economy picked up growth. If we are to believe that good economic data will continue (despite my doubts in the previous paragraph), no QE should be needed this year. 2012 GDP growth is projected at around 2 - 3% by economists. So why are the majority of Fed members pounding the table for QE3? Simple answer - our economic recovery is too fragile and can not be sustained without Fed's help. Let's not kid ourselves, training wheels came off at the end of QE1 and QE2, and we know what happened shortly after in both instances. So QE Light was put in place, and now QE3 may follow. Market fully anticipates this. 10 Yr T-Note futures just made new high, and much higher levels are still ahead, accompanied by record low yields. Whatever Fed's reasons are - high unemployment rate or slow housing recovery - they may hint about QE3 at their 2-day meeting in January (as they just whispered into CNBC's ear). By the way, I think that QE3 is not that bad of an idea, especially if directed at RMBS: equities will like it, bonds will like it, and more importantly - Fed will reflate the stagnant housing market. Housing stocks have gotten the message early in Oct. I believe that was about the time Fed started speaking about QE3 (via RMBS purchases) - I guess bear market plunge in S&P 500 did the trick.

click on chart to enlarge

But is housing really bottoming?
US govt is looking into wholesale disposal of FHA, Fannie, and Freddie-owned homes. Investors (mostly hedge funds and alike) will be buying these in bulk and renting them out. I have one major question - at what price? What do you think will be the bulk rate paid by those vultures? Can you imagine what it will do to comps in the neighborhoods where transactions will take place? Are we going to have another huge decline in prices due to that brilliant scheme? I say look for 25-30% discounts below CMV on those bulk transactions. Until now GSEs have been selling their properties on the avg of 5-7% below CMV to owner-occupants and small investors.
Home owners, who will see their equity evaporate and go into negative column on 25-30% hit due to comp sales in their neighborhood through this new program, will default on their mortgages in an instant. I am still yet to hear anyone explain how this vicious circle gets avoided. Until then, I will think that housing bottom is false and is about to drop out.

Technicals are flashing some possible changes ahead.
SPX is up against 1295 resistance again. Daily MACD is now negatively diverging from price. Daily Stoch is still embedded in buy, but once it crosses down below 80, we may have a bigger pullback than the one we saw on Fri. It is in rising wedge formation, a bearish reversal pattern. I wonder what may make traders pull the sell trigger: earnings, Europe, or just overly bullish sentiment, which is now flying high. We had a good run from Oct lows, pullback will not kill the trend.

VIX may help this possible bearish case. Divergence on daily inside of the falling wedge has developed and needs to be monitored. Higher volatility levels may be ahead.

click on charts to enlarge

Wednesday, January 11, 2012

GOOG, AMZN, IBM, ORCL divergence vs NDX

It is very hard to get bullish tech, when the most important tech companies are diverging from NDX. Whatever the reasons - earnings miss, lower margins, or weak demand - these four tech leaders are a drag at the moment. I would watch for this divergence (if it does not stop soon) to finally result in broader tech sell-off.

click on chart to enlarge

10 Yr T-Note Futures Breakout?

With equities on the rise, why is 10 Yr T-Note looking like it is about to breakout higher? Myriad of reasons may apply:

1. Fed has been speaking dovishly lately (with exception of very few). QE3 may be around the corner.
2. EU debt crisis is not resolved. LTRO did wonders on liquidity front. But solvency issues are far from being resolved.
3. Crawling DM and slowing EM GDP growth is weighing on investor sentiment towards the risk.

So we have possible conditions for ZN highs to be taken out.
Below is the chart of trend + momentum. It looks like bull flag is resolving in the direction of the trend. Bulls are buying breakout and possible o/n pullback to apex. The distance is 3 points. That would be one crazy move, resulting in new historical lows on yield.

click on chart to enlarge

Monday, January 9, 2012

I am concerned about GOOG and IBM

On the day when AAPL made a new all-time high, and SOX is trading up almost 2%, two of my favorite "generals" - GOOG and IBM - are trading down and are below their 2011 closing prices. I really do not think that NDX can continue to advance without these major heavyweights.

So I am going to prepare myself for the worst case scenario - GOOG and IBM missing their Q4 earnings, or guiding down Q1. Following charts are going to predict a dire outcome. They are merely a carbon copy of what has already happened with those stocks. But I am a strong believer of charts repeating again and again. This said, something pretty major would have to happen for this scenario to play out.

Two things would make me less worried:

1. GOOG's ability to turn around right here, at trendline, without closing below it even for a day.
2. IBM not closing below 173 on weekly basis.

click on charts to enlarge

Sunday, January 8, 2012

Houston, we have a problem! Part II - China

On Dec 23rd I said that my biggest worry is Italian 10-yr Bond Yield going back up towards the highs. It is just a matter of time (perhaps even this week) before new highs will be reached. While all market participants will be preoccupied with that "breaking" development, I would like to go one step further and talk about my second biggest worry - China.

China has an export-driven economy. EU is the largest customer of Chinese exporters. Therefore, health of Chinese economy revolves around the outcome of EU debt crisis. On top of European problems many other large customers for Chinese exports have fallen on hard times as well, as the world economy is grinding to a halt.

It is not surprise to many that Chinese GDP has been slowing down. Growth is expected to come in around 8% this year. While many countries would kill for that, it is considerable slowdown for Chinese juggernaut, and the trend is projected downward from here as well. Many economists are predicting further deceleration in GDP, with inflation still elevated above tolerable levels. Even China's Premier has spoken about the difficulty expected in the first quarter of this year.

The most important problem may be inside China itself. Domestic real estate has been crashing down and perhaps may lead to the biggest bailout yet. Speculators have bid up the prices to unreachable levels for vast population, which is unable to afford these lavish (by their standards) properties.
There are endless amounts of municipalities, which have been built in anticipation of growth and migration from poor rural areas. This urbanization of Chinese population has been the biggest reason behind the fast growth of second largest economy in the world. It resulted in enormous purchases of commodities and subsequent hoarding of them in local warehouses.
But how do you move 1.35B folks around the country without major dislocations and unfilled voids? At the end of this post I have provided a documentary about "ghost cities" inside China. Watch it, you will be amazed. How do you feel after seeing that? The most important takeaway (for me at least) came from the phrase by the interviewed analyst: "it's the quality and not the quantity of GDP that matters".

Since the beginning of post-Financial Armageddon recovery in March of 2009, investing community has developed a thesis that emerging world economies will lead the way. China, undoubtedly, has been the leader in the first phase, but now it may become the laggard, and I expect it to drag the world economy down if it does not bottom and turn around very soon. Many other emerging markets, like Brazil and India, have also been hit hard.

I decided to show a chart of Shanghai Comp over S&P 500 and CRB Commodity Index. While Shanghai Comp outperformed in 2009, it has deteriorated from there and has really accelerated its decline in the second part of 2011. More increasing divergence has developed over the last few months. Shanghai Comp Index has now completely disconnected from the risk trade. This, for sure, can not continue for too much longer.

Here is my conclusion. China has amassed $3T of reserves in its coffers. While everyone has assumed that they will bail out EU, China itself will probably need an enormous bailout to prevent hard landing at home. This fact may keep the risk trade in check, since there will be less money thrown by them at everything else around the world. I do not really know if we see this play out now or later in 2012, but we are heading for some turbulent times in Big Panda's backyard. Keep your eyes on Shanghai Comp.

click on charts to enlarge

Thursday, January 5, 2012

NFP Friday Trade Idea

A trade may be setting up for NFP Friday. This development is very interesting - while today NDX broke out above Jan 3rd high, DOW and SPX did not. Deja vu? Is this going to be yet another unconfirmed b/o of tech, just like many times last year? Almost all of those led to steep declines.

So we will get NFP @ 8:30 am est. If the report is less than perfect (if you know what I mean), stock index futures will sell off and may fill gaps below. Obviously, there could be a stop run just above the highs and the reversal to follow. Hourly close above those levels will constitute a breakout (in my book).

click on chart to enlarge

Wednesday, January 4, 2012

DAX Futures Projected Targets

A quick look at our European leading counterpart shows that it has a horizontal hurdle to jump over. While the price has broken out of the wedge, it is butting up against 6200.
Market continues to be on the lookout for possible S&P EU sovereign rating downgrades, as well as continued EU banking system stress. I am not sure DAX futures can take out this 6200 resistance if downgrades come and further cash hoarding by European banks prevents a flow of liquidity in overnight lending market. Perhaps DAX pulls back to test the wedge apex @ 5850.

Should the news flow improve, DAX futures may be successful in overtaking 6200 resistance, and the next resistance would come @ 6450.

click on chart to enlarge

Tuesday, January 3, 2012

Financial Market Mid-day Report

Market participants have decided to concentrate on positives versus negatives today.
Much better than expected Econodata from around the world has trumped worries about Iran and EU debt crisis.

Most PMI numbers absolutely blew passed expectations (table below), with some climbing back into expansion territory. Was Dec surge one-off due to Holiday sales demand?? Across the board strength like this can not be discounted. We need to keep an eye on next month's reports for a developing trend.

On the other side of this, Iran is flexing its military muscle. WTI has gone above $100 and is breaking out. This is not going to help consumers at all. I knew a week ago it would be a while before we see sub-$3 a gallon gas again.

In EU the spread between 10 Yr French and German bonds is widening again. This is, no doubt, due to expectation of French AAA rating downgrade. Let's get it over with already, S&P!!

click on charts to enlarge

Monday, January 2, 2012

European Bank Stress Continues

Today I saw the news headline on Reuters that EURIBOR went down sharply. While I do not want to rain on their parade, this fact could just be merely a byproduct of ECB's half of trillion euros LTRO operation in Dec.

I decided to pull up EURIBOR chart and compare it with LIBOR-OIS Spread and TED Spread. You can clearly see that while EURIBOR has declined in Dec in anticipation of LTRO and after it, LIBOR-OIS and TED spreads did not confirm the decline.

Here is the reason why: LTRO resulted in enormous deposits by participants back with ECB, money never left ECB's coffers, it just got reshuffled, no overnight bank-to-bank lending is being done in EU. Also I think that dollars are still tight and remain in high demand, even after Big 6 CB's 50 bps reduction of swap rate (more than a month ago). Hence EU banking system-wide stress continues today.

I purposely pulled up 5 yr charts to show that we are at elevated levels and broke out above 2010 highs. But even with this development in progress, we are nowhere near the levels reached during the Lehman's collapse. So while we need to be concerned, it is not the time to get extremely alarmed just yet.

We need to monitor and see what transpires in the next few weeks...

click on charts to enlarge

Update on Jan 3 @ 11:40 pm
One more gauge of EU bank stress, EURIBOR - EONIA Spread shows elevated levels and possible breakout coming.