Market sentiment chain of events; chart updates July 9, 2009
Posted by Warren in Central Bank, Energy, FX, Government, Metals, Stocks.add a comment
Cyclical recovery and commodities have dominated the news since Q1, but prices have experienced a near collapse during the past month; this is a very drastic change in market sentiment. My take on the chain of events impacting market sentiment this year is as follows: (i) Fed/government props up market via historic stimulus/bailout, (ii) inflation fear prematurely turns into hyperinflation fear, fueling risk-taking, (iii) stocks recover and green shoots sprout everywhere, (iv) an optimistic and inflation-fearing Fed/government prematurely indicates plans to roll back historic stimulus/bailout, (v) hyperinflation fear turns into deflation fear, curbing risk-taking, (vi) stocks sell off and green shoots are put into doubt, (vii) ???. As for subsequent chain of events, I expect the Fed/government to realize its premature mistakes and eliminate any doubt of economic recovery (while at the same time implementing much needed additional fiscal/monetary stimulus). Consequently deflation fears will dampen and risk-taking will resume. As for timing, I expect the Fed/government to act before the current stock sell-off gains serious momentum (so pretty soon). It is interesting to note that despite the drastic sell-off in commodities during the past month, the dollar index has not moved all that much; the current currency devaluation trend is still very much in play.
Dollar index: 9-month (this chart gives me comfort that commodities prices are currently oversold)
Silver: 6-month (back to 12.80! BUY!)
Crude: 6-month (down $14 since last week’s scandal; could hit 55 but 60 seems to provide strong support)
Treasuries: 6-month (breaking out; rates have room to go lower while commodity prices (and inflation expectations) recover)
Shorting more stocks July 2, 2009
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It looks like stocks are about to roll over to the downside; cyclicals are struggling and the economic growth story is starting to lose its lure. Fears of credit (consumer credit) contraction is back in the media and the long term implications of jobless Americans are coming to light. From a technical perspective, almost everyone seems to be talking about the head and shoulders formation. Despite this renewed bearish sentiment, only time will tell if this correction gains any momentum. As much as any calls for hyperinflation are premature at this point, the government’s recent indications about closing down the various credit/liquidity facilities and stimulus measures are very premature.
S&P: 9-month
Bearish rising wedge pt. 2 April 20, 2009
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…still, the last stand.
S&P JUN09: 1-month
Gold: support?
Bearish rising wedge April 16, 2009
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…the last stand.
S&P JUN09: 1-month
SHORT STOCKS, LONG GOLD April 13, 2009
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I think market sentiment/expectation has gone to irrational extremes. Stock market has rallied based on (i) potentially decelerating negative economic data, (ii) bullshit promises from G20 (seriously, G20?!), (iii) FASB mark-to-FRAUD and (iv) fabricated/misleading bank earnings. The true fundamentals (I’m tired of listing them out) have been completely ignored…ENOUGH IS FUCKING ENOUGH! I’m not going to lie, gold has been a frustrating trade (i.e. I LOST A SHIT LOAD OF MONEY) this past month, especially after the QE announcement. Personally, the bearish sentiment for gold hit its extreme yesterday when I wrote a post about shorting gold and actually shorted it (but flipped back to long and shamefully deleted the post!); I think my mistake here is a sign that gold has hit the bottom. The powers that be have done a dandy job of orchestrating a recovery, but prices can only deviate so far from the underlying fundamentals.
Stocks: 7-month (it’s going to take some serious BS to break the resistance level; also note the flat RSI and decreasing volume)
Weekend chart reviews March 21, 2009
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S&P 500: 3-month
AUD/USD: 1-year
Silver MAY09: 18-month (ready to EXPLODE)
Brace yourselves- equity meltdown imminent February 28, 2009
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Equities have been pretty much sideways since the market crash of Oct-Nov 2008. Despite a never-ending list of government stimulus/bailout/policy reform (much of which is counter-productive to say the least), it has become clear that the government is absolutely clueless. Why do I think I’m right, while the all mighty government is wrong? I’ll let the markets answer that…
S&P 500: 25-years (mother of all double-tops?)
(Source: taichiseal.blogspot.com)
As for gold, a significant sell-off in equities below Q4 2008 lows could be the catalyst that sends gold into four digit territory. There is a minor concern, however, as to the deleveraging effect that such a sell-off might have on gold…we could find out as soon as this week.
Gold APR09: 1-month (up $75/oz and down $75/oz in less than one month = great for trading)
Nikkei down 1,000+ October 8, 2008
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USD/JPY is now double digits and the Nikkei is down 1,000+ today.
Nikkei: 22-months (down 50%)
Brazil longs better watch out September 11, 2008
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Brazil…the “B” from BRIC. Unlike its peers, Brazil’s currency and stock index have barely started to buckle to the downside. During the past half-decade, not only has Brazil benefited from EM longs, but Brazil has also benefited from commodities and resource longs. Well, those longs are pulling the plug right now, so I expect BRL and Bovespa to develop a strong downtrend in the medium term. I am currently short BRL, and I plan to buy 45.0 OCT puts on EWZ when the stock market opens.
BRL and Bovespa: 5-year
EWZ: 3-year
Tech: diamond reversal September 9, 2008
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I’ve been following the diamond formation in NDX for a while, and there is finally a break to the downside.
NDX: target=1650, stop=1800
Another engineered double bottom? September 9, 2008
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We could see a dramatic sell-off if stocks don’t hold support. I’m betting that we won’t see a double bottom, and I expect to see SPX below 1200 by next week.
SPX: target=below 1200, stop=1250
Stocks are also breaking down September 4, 2008
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I started feeling bullish on stocks right before Labor Day weekend. The charts showed some room to rally in the short term, but technicals have quickly turned bearish. I flipped my long NDX position today.
Starting to feel bullish on stocks August 28, 2008
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…but only for the short term (2 weeks at most). Stocks are breaking out of a short term downtrend, and I think S&P and Dow will test the 200dma. I also see a rally in NDX to about 2000. This scenario fits with my short euro and gold positions for now.
S&P and Dow: 1-year
Tech stocks seem most stable? August 23, 2008
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I’m not bullish on stocks in general right now, but tech stocks continue to outperform everything else. I think we’re going to have another down leg in stocks, but at the same time, I think that a healthy rise in tech stocks (over the long, long term) is supportive of the secular gold bull market. For now, however, there is a diamond formation in tech stocks, and I am betting that there will be a break down by the end of the year.
Gold bubble? August 21, 2008
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Many are wondering whether the correction in gold is over or still in progress. We may see a low of $730 as gold consolidates, but I don’t think the long term gold bull market is over. Gold will not suffer the same fate as tech stocks. The “insane” amount of leverage and exuberance that created the tech bubble is certainly not present in the gold market.
Gold and NDX: 10-year
Credit spreads creeping up (blowing up for WaMu) July 25, 2008
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One of the main reasons why the Fed bailed out Bear Stearns was to prevent an explosion of CDS written on Bear (or alternatively, CDS written by Bear). Credit spreads have cooled off since Bear went down, but they are on the rise again. The recent bounce in financials has produced some eyebrow-raising returns. For example, Wachovia rose over 140% in 7 sessions despite reporting a $9B loss. There is a lot of talk about the sustainability of this bounce, but the credit market seems to provide the most honest picture:
(note Wachovia’s credit spread)
(…and WaMu…WooHoo)
Are we about to see a run on WaMu?
Evening doji star July 25, 2008
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Stocks have formed the infamous evening doji star pattern during the past 3 sessions. Unless we get some really positive data from durable goods orders, consumer sentiment, and new home sales on Friday morning, it looks like we may see some more downside.
S&P 5-month
Dow 5-month
Range bound: trader’s market July 24, 2008
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Most assets are currently testing either resistance or support, and they will probably be range bound until we get some more definitive news. I think the stock market has squeezed all the positive news it can possibly extract for now (crude correction, no shocking earnings), and the government’s bag of tricks (FNM/FRE bailout, SEC don’t-short list) seems to be waning. I expect markets to reverse their short term trends ahead of next week’s payrolls. My targets for next week are as follows:
Short S&P SEP08: target=1240 stop=1290
Long Euro SEP08: target=$1.575 stop=$1.5575
Long Gold AUG08: target=$955 stop=$915
Bounce Bounce Baby July 22, 2008
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Equities have finally put in a temporary bottom, and it looks like the rally will continue for the medium term. Just as all the macro puzzle pieces seemed to fit together for the next dollar sell-off, the short-dollar puzzle is now falling apart (temporarily), and it will take some time to piece it back together (probably late Q3).
Financials bounce, crude corrects, gold holds steady… July 20, 2008
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We finally got a bounce in stocks, notably financials. The SEC’s attempt to scare (squeeze) bank shorts is just another sign of desperation…by the way, why didn’t the SEC include Wachovia or Wamu in their do-not-short list? Meanwhile crude is undergoing a correction (long overdue), which has put some pressure on precious metals, but not as severe as recent correlations suggest. Gold:Crude ratio has actually risen sharply this month, and I think it indicates a significant change in market sentiment in favor of gold.
Gold:Crude ratio YTD
Speaking of gold…what’s up with gold stocks? My favorite gold stock, YAMANA, got hammered this past week. Yamana had a spectacular breakout late June, but it has since erased all those gains. Indeed it’s pretty frustrating to see mining stocks underperform the physicals so drastically. There are no doubts about the strong fundamentals of Yamana (it’s the one stock that I’ve actually done my homework), so I’ll just keep buying the dips. I think Yamana’s sell-off last Friday provided such an opportunity, so I bought some Aug 16.0 calls…I figure I’ll cover if the lower range is broken, otherwise it should rally to at least 16 before mid-August.
Yamana (AUY) YTD
Update on 7/22/08: Yamana broke 14. Maybe some other time…
Treasury promises to buy Fannie and Freddie equity July 14, 2008
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I talked about the possibility of a reflation attempt in the near future, and we just might see it. Despite the 250bp rate cuts and “innovative” credit facilities by the Fed, we have yet to see a full blown monetization effort by the government. Fannie and Freddie own over $5 trillion of US mortgages, and the government will do anything to maintain market confidence; this is just the beginning of the end. Bear Stearns is nothing compared to the current problem, because the potential systemic risk goes beyond the financial markets; the full faith and credit of the US government is on the line. At times like these, I’m amazed at how schizophrenic the market can be. Just last month, Bernanke was mouthing that downside risk had diminished, and that he was considering rate hikes to support a strong dollar. HA! Indeed this whole situation is very sad, and a lot of people’s lives are going to be ruined because of it. But seriously, Wall St and Main St should have seen this coming.
Interpreting EUR/JPY and Equity Divergence July 11, 2008
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During the past half-decade, eur/jpy has (had) been highly correlated to stocks. This correlation is currently breaking down. So what does a rising eur/jpy mean after a wild consolidation since the subprime crisis went full blown last summer? I think it means that deleveraging is slowing down as investors are finally grasping the direction of various markets and acknowledging that a bear market in stocks has begun. Therefore, the divergence between eur/jpy and stocks will continue, whereas eur/jpy and gold, for example, will start to correlate.
EUR/JPY and SPX: 6-year
EUR/JPY and Gold: 2-year
Yamana: back up the truck June 19, 2008
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I’m starting to like these diamond patterns…
Update: because diamond reversals are rare, and frankly I’ve never heard of the pattern until recently, I’m putting up a historic example of a diamond reversal that worked out well for bulls.
Dow breakout to all time high last year:
BlackRock Buys $15bn UBS Debt May 6, 2008
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From tonight’s FT headline:
“BlackRock, the US asset manager, will pay UBS $15bn (£7.6bn) for a portfolio of subprime mortgage debt in a deal that the Swiss bank plans to announce on Tuesday with its first-quarter results, people familiar with the transaction said.”
Seriously, someone’s been smoking too much black rock.
TOP in POT April 29, 2008
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POT (largest potash and nitrogen fertilizer producer in the world) has seen a dramatic rally during the past year, which has recently gone parabolic. The cultivation of corn is the largest use of potash fertilizer, and POT has benefited from a dramatic increase in the demand for corn, not only from rising global demand, but also from the ethanol craze that began a couple years ago. But corn-based ethanol is probably one of the worst policy decisions made by the US government, and I expect the ethanol craze to quickly disappear as more and more people realize its detrimental impact on sky-rocketing grain prices. There is significant downside risk to POT if there is a reversal in the government’s policy on ethanol. The rising price in natural gas may also start to hurt POT’s profit margins with respect to its production of nitrogen fertilizer. Moreover, there seems to be some more correction left in the commodities complex, which will add more selling pressure. Technically, it’s hard to ignore the RSI divergence and the massive weekly doji that formed last week. A big down bar this week could very well signal a TOP in POT.
Jim is predicting a correction in POT that is similar to that of FXI, which had also gone parabolic before correcting by over 45%.
Earnings uncertainty: buy Yen protection April 17, 2008
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Following yesterday’s impressive rally in equities, Yen dropped down to 102.35. Yen was trading at pretty strong support this morning, and I think 102 is a good point to buy Yen. Indeed markets have calmed down significantly during the past few weeks. But uncertainty in earnings seems to be stoking some volatility and risk aversion, so I think it will be prudent to hold some Yen until we clear through earnings season.
