Thursday, February 28, 2013

The Gift of Imagination


When prodded about his thought process, Einstein once famously said, “When I examine myself and my methods of thought, I come close to the conclusion that the gift of imagination has meant more to me than any talent for absorbing absolute knowledge.” Continuing, he added, “All great achievements of science must start with intuitive knowledge. I believe in intuition and inspiration…At times I feel certain I am right while not knowing the reason.” Concluding, he finished, “I am enough of the artist to draw freely upon my imagination. Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.”

Generally speaking – and as pretentious as it may be to strike the parallel, I approach visualizing markets and momentum through a kindred prism. Technical analysis is knowledge – knowledge of the past. Intuition – through creativity - helps unlock the future.  

With that said, the immediate future continues to look troublesome for the euro, Aussie, silver and the precious metals miners.  

*  All stock chart data originally sourced and courtesy of www.stockcharts.com 
   - Subsequent overlays and renderings completed by Market Anthropology. 

Tuesday, February 26, 2013

The Signal & the Noise

To put it mildly, there are some interesting kinetics developing in the currency markets these days. And although the Monday morning pundits will point to XYZ to fit their respective bylines, the truth is these currency moves - the euro, Aussie, the US dollar to name a few; have been building for quite some time. We should know, we have eagerly watched their potential energies build beneath the surface. It is why we had expected a binary environment in the currency and commodity markets - as tensions built in momentum and relative strength divergences and lulls in historic correlations. With considerable process to interpretation - rather than reaction, we find ourselves driving the train rather than colliding with it. 

A few things to consider here:
  • We would caution against relying on oversold RSI readings, sentiment and COT reports - to position mean reversion strategies in this kind of environment. Look no further than the recent action in the Japanese yen and the precious metals miners for examples of the inertia behind these moves. You typically find strongly oversold conditions develop on an hourly and daily basis and replicate through to the weekly measure over time. To a degree, we expect similar dynamics to develop in silver, gold, the euro and the Aussie over the coming weeks.
  •  Of the previous two (2) occasions where the euro:US dollar index exhibited a pronounced drop in the historic correlation - the return trip to "normalcy" was commensurate to the size of the "signal". Both occasions marked exhaustion for the euro - and the asset river that runs through it (see Here). Also, on both occasions (8/08 & 9/11) silver failed quite dramatically over a relatively short timeframe. 
  • Downstream, we expect the ledge support for the euro extending from November 2005 - to fail in this decline and add further downside momentum to the move. 

* All stock chart data originally sourced from www.stockcharts.com and subsequently rendered by Market Anthropology. 

Monday, February 25, 2013

Connecting the Dots - 02/25/2013

The long and short of things: The US dollar hollered - and the "silver" lining in equities gets paper thin. 
  • Continuing their declines, silver and the silver:gold ratio fell sharply (-3.76% and -1.84%, respectively) again last week. The silver:gold ratio's performance spread to the SPX (as measured from the start of the secular bear market in equities in March 2000) also contracted. We continue to maintain a bearish perspective towards silver and the precious metals and expect the lows from 2012 to be broken in the first half of this year. After last week, the silver:gold ratio's performance spread to the SPX stands at 140 basis points. This is the narrowest spread for this reflationary measure of the equity market rally that began in March 2009. In the past (2000 & 2007), when the silver:gold ratio's performance has "inverted" below the SPX's, this has indicated the start of another cyclical leg lower in the equity markets. It is our expectation that this disinflationary construct will provide another performance inversion in the short term. Although a shallow retracement would not surprise us, risk remains firmly on the downside in silver - despite the most recent decline exceeding the expectations of the 1992 Nikkei comparative. 
  • The atypical correlation drop in the euro/US dollar index extended and made a new all-time high last week - despite the continuation of the rally in the US dollar. Since the euro peaked in July 2008, these diminished correlation extremes have marked exhaustion for the currency.    
  • Although strongly selling off in the first half of the week, the Australian dollar closed marginally higher (+0.25%) with net speculative long positions continuing to recede over the previous week. We continue to maintain the opinion that the Aussie is carving out a long-term secular top. The Aussie comparative was slightly refitted to the price and momentum profile of the previous USDX top. 
  • The RUT:SPX ratio had its largest weekly decline since the equity market lows in November. We continue to follow the aberrant positive relative strength divergence to the lower lows in the RUT:SPX ratio that is present again as it was during the last secular turn. We also continue to follow the inverse correlation of the RUT:SPX ratio to the US dollar index that was present as well during the previous pivot. Considering the divergent resistance was again maintained in the RUT:SPX ratio, going forward, we once again expect small caps to underperform large cap stocks - likely on the downside.    
  • The SPX continues to be pressured by the overhead resistance of the long-term (monthly) meridian. Since it broke through with Lehman Brothers in September 2008, the meridian has capped every subsequent advance. Although price appears to be on the cusp of a break through (circa May 1995) for February - momentum has stalled at resistance.   
  • Apple exhibited follow-through on the downside last week and continues to follow the powerful momentum unwind of oil - circa 2008. This has greatly limited the retracement rally in the NDX, compared to the new recovery highs displayed in the SPX and RUT. 
  • Both the Shanghai composite index and the CRB index were sharply lower (-4.86% and -1.65%, respectively) last week. Considering our outlook on the US dollar, we continue to maintain that the CRB index will once again roll-over and break the lows from 2012. 
  • The precious metals miners continue to underperform - despite the pronounced weaknesses in spot prices. We maintain a bearish perspective on the miners, for the simple reason we believe weakness in the precious metals complex is ongoing. 

Friday, February 22, 2013

Leaving the Station

While the collective market opinion was under the persuasion of a conventional technical wisdom, those of us following the fingerprints of a broader market psychology have been rewarded as the US dollar index extends its reflexive trajectory out of another intermediate low. 
Not surprisingly, this has come at the expense of the commodity sector - which appears to be catching up to a shifting zeitgeist that sees the US dollar as a major threat to what was a positive carry for the asset class. 
A more nuanced guide for the dollar can found through the euro on the Mirrored Pivot chart from a few weeks back (see Here).  
As with each market cycle, explosive returns are made and lost in transition - as the train leaves the station. Although a shallow retracement is likely next week, the US dollar appears to be well on its way to clearing the platforms and exiting the station.

Thursday, February 21, 2013

Dominoes

What started off as a tinder ignition in the currency markets this fall - namely, the US dollar asserting quiet dominance over each of the major currency crosses (first the yen, then pound, Aussie, the Swiss franc and recently the euro); has now caught flame in the more emotional risk proxies of the hard commodity markets - specifically, gold and silver. 

And while silver typically runs the rabbit leg with gold on the risk continuum, the market began heavily selling gold over the past few sessions. This dynamic in turn has arrested the silver:gold ratio in the most recent swoon from undercutting the lows from late December. 

To make a long story short, we believe the recent leg lower in the precious metals sector will likely continue - until the silver:gold ratio makes a proportional low. Considering gold has recently led the charge in undercutting its August low, this volatile feedback loop appears to have ample room remaining to inflict additional collateral damages in the short term. 
This perspective is also buttressed by the Value Trap comparative - which to date has recognized very similar momentum signatures in how the financials capitulated and led the broader market lower in 2008 and 2009.  

Simply put, the miners have done the same with gold and silver here. 

Monday, February 18, 2013

Connecting the Dots - 02/18/2013

The long and short of things:  Silver, Gold, the CRB & the precious metals miners - put the dis in inflation: 
  • Silver and the silver:gold ratio fell sharply (-5.12% and -1.75%, respectively) last week. The silver:gold ratio's performance spread to the SPX also contracted. We maintain a bearish perspective towards silver and the precious metals and expect the lows from 2012 to be broken in the first half of this year. Downstream, this could put the SPX in jeopardy of outperforming the silver:gold ratio (as measured from the start of the secular bear market in 2000); which in the past (2000 & 2007) has indicated the start of another cyclical leg lower in the equity markets.   Conversely, should silver and silver:gold ratio bounce sharply - while the SPX corrects or underperforms on a relative basis, we would view that dynamic favorably towards the short to intermediate term in equities. Our expectation is that silver and gold are working on short term lows. Each retracement bounce since QE3 was announced in September has been shallower in performance. We expect the same diminishing reflex again this time. 
  • The euro traded marginally (-0.07%) lower last week reversing the retracement bounce it held early in the week. The US dollar traded modestly (+0.42%) higher - rejuvenating the atypical correlation drop that began in December. Since the euro peaked in July 2008, these diminished correlation extremes have marked exhaustion for the currency. We continue to view the US dollar index as primarily "caged" by the euro, as evident in the atypical correlation as well as the glaring divergence to the equal weighted US dollar index (FXCM) - which extended to new two year highs again last week.  
  • The Australian dollar further extended away from long-term resistance with net speculative long positions plunging over the previous week. We continue to focus on the Aussie, considering its long-term correlation to risk appetites in the SPX as well as the precious metals market - specifically gold. The window in the diminished correlation extreme between the Australian dollar and gold sharply began to revert last week. We maintain the bearish expectations of long-term breakdowns in both the Aussie as well as gold, as the respective pivots once again tighten from the kinetic wand of the US dollar.
  • Although the Russell 2000 extended their new all-time highs last week, over the intermediate to long-term - we favor large cap stocks over small and make the ratio (RUT:SPX) comparison to the downturn through 1997. Noteworthy, is the atypical positive relative strength divergence to the lower lows in the RUT:SPX ratio that is once again present as it was during the last secular turn. We also continue to follow the strong inverse correlation of the RUT:SPX ratio to the US dollar index that was present as well during the last turn. Considering the weekly RUT:SPX chart is at its divergent resistance, a sharp reversal in the ratio - as well as the equity markets appears imminent.
  • The SPX is once again pressured by the overhead resistance of the long-term (monthly) meridian. Since it broke through with Lehman Brothers in September 2008, the meridian has capped every subsequent advance. Although price appears to be on the cusp of a break through (circa May 1995) - momentum has stalled at resistance. Despite the calls by many for a new secular bull market, we find no indications that it will be different this time around. 
  • Although Apple has taken greater time - when compared with the great momentum unwind of oil, circa October 2008; it appears vulnerable in the short term to rolling over once again and making new lows for the year. 
  • The Shanghai composite index was closed last week - while the CRB index was again modestly lower (0.87%). Considering our outlook on the US dollar, we continue to maintain that the CRB index will once again roll-over and break the lows from 2012. 
  • The XAU index continues to underperform - even during pronounced weaknesses in spot prices. We maintain the bearish perspective on the miners, for the simple reason we believe weakness in the precious metals complex is ongoing. The XAU:Gold ratio has colored this expectation and continues to point to new lows in the coming weeks for the miners - as well as spot prices.