Friday, March 29, 2013

A Little Perspective

File this with more qualitative thoughts and reasonings - a space we find ourselves frequenting lately as the US equity markets tempt fate for a third time. With glass on our shoulders (see Meridian), we would be fooling ourselves if we did not consider scenarios A through G of what could happen should the other panes break with conviction - or if we should continue to focus on trends we have had the strongest reads on and ignore what they eventually should mean to the equity market cycle. Translation: (Insert overused quote on irrationality from Keynes here)
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Granted, the intuitive trades for us have come from the liquidation corners of the market, namely,
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the precious metals complex - buttressed by the currency differentials between the US dollar and the euro - and what we have perceived to be a rather rational unwind in Apple. Of course, the follow up question, "Why is Apple unwinding so  diligently in a teflon tape?", likely resides closer to the same dog that's sniffing around and wagging the precious metals complex. Needless to say, we consider it anything but benign and scented for canine satisfaction.
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From our perspective, world markets (ex-US) have been discretely rolling over throughout the first quarter. Europe, the BRICs, Canada - you name a major equity market and it very likely turned down before or during the month of March. Collectively, that balance is expressed in the MSWorld market chart shown below and to the left.  Perhaps we are colored by a certain bias, but see the dynamic primarily motivated by the US dollar's newfound dominance, namely, in the face of a wounded euro and Europe. Downstream of the euro's Q2 pivot (see Here- world markets have yet to find the same traction the SPX has enjoyed. It isn't a causal coincidence to find the correlation, considering the burgeoning emergent economies so closely tied to the commodity cycle - and the fact that Europe is China's largest trade parter. 


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From a comparative performance perspective, the current market landscape most resembles the topping process in 2000, where the negative divergence in performance between the SPX and the rest of the world grew steadily - until the US equity markets exhausted in late March. While some will certainly ignore this divergence or even sugar coat it as simply a safe-haven equity flight to the US; the simple truth is world growth - of which the financial markets are the the tip of the spear - are more entangled than ever. The US may outperform for a spell, but we'll still catch the same bug should the world get ill. 
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As we've discussed over the past several weeks in various notes (see Here & Here), the conditions we are most concerned with in the broader macro context is the persistence of disinflationary momentums that under the right conditions could exasperate a turn in confidence in our monetary handlers mettle to fight underlying deflation. We feel these concerns are evident in the inflation data in the face of considerable monetary stimulus and our focus on assets that not-so-long-ago were the darlings of the cycle - such as the precious metals complex and Apple.   

We also continue to focus on the silver:gold ratio, because historically its contraction has marketed the end of a reflationary drive in equities. The ratio can be used either as a proxy for risk appetites, whereas, the higher beta asset of silver is contrasted with gold; or as a leading indicator of economic conditions, considering silver's industrial demand versus golds perception as a safe-haven in certain market conditions.  

Below is a longer-term chart of the SPX and MSWorld indexes contrasted with a smoothed silver:gold ratio as expressed by its 50 week SMA. In the previous two equity market tops, the silver:gold ratio peaked and turned down before the credit and equity markets got the memo that risk management has left the building.

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The two charts below paint somewhat similar momentum profiles in which both cycles had large indiscriminate bids in risk appetites (as expressed by the parabolic nature of the silver:gold ratio), sandwiched between two smaller financial crises - before the broader cycle turned down.

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Following up on the silver:gold/SPX performance spread, the construct exhibited the widest inversion since the start of the secular bear market in equities in March 2000. Considering our expectations that weakness in silver will persist (see Here), we see no reason in joining the party and chasing the equity markets on the long side here.  
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Back in September, immediately following the commencement of QE3 - I wrote a note that addressed some of my concerns pertaining to what I perceived to be a double edge sword with the great commodity unwind (see Here):    
"I like to remind myself that it's much easier to rekindle economic growth across the globe, when all that is required is a large shovel, boat and a frothy marketplace. 
Although commodity inflation has provided the US consumer a painful transition in the pocketbook over the past decade, we likely do not fully appreciate how beneficial that same knife has smoothed the impact of our own financial stumbles - in a world more than ever financially dependent upon the health of the majority."
In light of the continued downturn in the commodity sector and the slowing growth evident throughout both the emergent and developed world, I find myself considering aspects of our Constructive Interference Theory - through the prism of what could happen if both the commodity and equity market cycles turned down together against the backdrop of a declining to troughing interest rate environment. It would be the backside of the global constructive interference wave that began over 40 years ago. As evident from the long-term chart which depicts these three asset cycles - it would be new territory. With that said, and with the perspective of 200 years of market history - the Everest slope of a declining interest rate environment over the past 30 years which helped imbibe the greatest equity market returns - were never in the same league. In many ways - ignorance until proven guilty has been blissful capital management in the equity markets. Certainly easier said than done, considering the range and trauma the equity markets have traveled over the past 13 years. But within the broader historical context - well within reason.  


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

Wednesday, March 27, 2013

Euro-peon Vacation

After walking the Mirrored Pivot's line for over six weeks, the euro appears to have another binary opportunity as it either firms over the next few sessions and follows the line - or things get disorderly on the downside. While we are leaning towards the former, our best guess is if we continue to slide through tomorrow's close - the risks shift towards a more disorderly market in the short-term.  

Tuesday, March 26, 2013

Zero Sum Game

On a long enough timeline, the effects of quantitative easing(s)... 
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* Tongue-in-cheek... sort of. 

Monday, March 25, 2013

Connecting the Dots - 03/25/2013

With a week remaining on the clock in March Madness, the SPX currently sits above its long-term meridian. 
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Below is a comparative chart of the current SPX through Friday's close, contrasted with the initial route the market drove from ~ the 1485 to 1555 interchanges back in the summer of 2007. Close enough for government work - which some might say seems about right.  
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Last week, the silver:gold/SPX performance model continued to blow-out, exhibiting the second widest (weekly) inversion spread since the construct began with the start of the secular bear market in equities in March 2000. This comes in right behind the week preceding the Lehman Brothers bankruptcy. 
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We feel it is entirely too early to judge the kinetic impacts to the markets, despite the 11th hour deal in Cyprus last night that took the two most obvious threats off the table; namely, a disorderly exit from the euro and the sacrament of banking trust - losses to insured depositors. 
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All eyes remain on the Shanghai Composite Index to see if it continues to roll-over - or rekindles the trend higher as the breakout leg of the 1982 SPX comparative did. Should the uptrend reestablish itself, we would consider it a major positive proxy for the balance of growth X-Europe and primarily driven and smoothed by US demand and Chinese stimulus. 
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We consider the primary motivational difference in recent trend between the two typically closely correlated commodity currencies of the Australian and Canadian dollars - to be China's perceived stabilization. Should China begin to roll, we would expect the Aussie to play catch-up to the Loonie on the downside and vice versa should China's uptrend firm.    
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*  All stock chart data originally sourced and courtesy of www.stockcharts.com 
*  Subsequent overlays and renderings completed by Market Anthropology

Saturday, March 23, 2013

Halfway Down the Stairs


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For further context, see Here: 

*  All stock chart data originally sourced and courtesy of www.stockcharts.com 

*  Subsequent overlays and renderings completed by Market Anthropology

Thursday, March 21, 2013

Total Consciousness

The one constant in trading the precious metals market over the past two years is that patience has paid very well, once the next downside stair was taken. 

Tie goes to the bear, so to speak. 

When the illusion of QE's transmission to the commodity markets was broken with the blow-off top in the spring of 2011, the first stair lower quickly appeared. 
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Over the past six months since QE3 was introduced, silver - our emotional commodity proxy of choice for either the CRB or CCI - has mimicked the broader pattern and stair-stepped lower. And while the bulls are hoping that we have finally reached the bottom of this flight, the unfortunate truth is they have very little to show for it after basically running in place over the past month. 

A disheveled Bill Murray in Caddyshack comes to mind. 

"Hey, Lama, hey, how about a little something, you know, for the effort..."   

To be fair, I'm sure there are plenty of bears (myself included) - that feel the same way. 

Total consciousness, while quite appealing - still remains elusive.
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Considering the troubles in Cyprus this week, I think many were expecting more of a running and fevered bid for gold and silver. Unfortunately, that perspective ignores recent history that suggests troubles in Europe have typically not translated into much lasting safe-haven demand for precious metals. For all their bluster of "protection" - so goes the euro: so goes silver, gold, the CRB - etc.
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The euro continues to trade closely along our Mirrored Pivot glide path - while starting to normalize the typical inverse correlation it has held with the USDX.  
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We find it interesting that the literal "measured" moves (both the euro and USDX) from the Mirrored Pivot - are roughly proportional to the expectations of the secular comparative of the USDX. 
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All things being equal (USDX up:PMs down) - that still looks like a pretty big step to take for the precious metals sector.  
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As always - Stay Frosty


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

Tuesday, March 19, 2013

Mining for a Blue Light Special

Based on its momentum signatures and their congruence to the comparative - I pulled forward the GDX:GLD ratio a few weeks. 

The long and short of things: the perceived value in the miners in January (see Here), that bled cheaper in February (see Here) - appears poised for markdowns once again.  
Here is the original fit with today's GDX:GLD ratio. In either case, and as I have stated before with respect to the recent trends in the currency markets - utilizing oversold metrics such as RSI and sentiment can be traction-less strategies in this environment. 

For further context, see:



Driving the Euro - with its Rearview Mirror

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For further context - see Here

Monday, March 18, 2013

Connecting the Dots - 03/18/2013

While we appreciate the instant gratification, the recent news out of Cyprus on Saturday was nonetheless surprising in light of our silver:gold/SPX performance model that fulfilled the criteria of a sell signal at the end of last week (see Here). Not making the comparison that some in the media have extended this weekend, but we couldn't help but notice the last occasion the spread flashed concern was directly before the Lehman Brothers bankruptcy in September 2008.
Despite the newborn fracture in the equity markets, the now maturing and cascading trend in the euro is starting to make greater headline and fundamental sense - in light of the explosive correlation conditions highlighted in the ECB Hubris Meter chart over the past two months.
Come Monday, the euro's Mirrored Pivot track should fulfill another downside proportion on its way to likely an initial test of long-term support ~122.  
Although we recognize the strength of the US recovery to-date, we feel the primary driver of the US dollar is considerably less motivated by the vintage of economic prosperity that drove its last secular turn. The long and short of things - we feel the juxtaposition this time around the block looks weak. 
Downstream, the asset relationships that are heavily impacted by dollar strength / euro weakness continue to appear vulnerable to further declines.  
We will be closely watching the Shanghai Composite Index to see if it continues to roll-over - or rekindle the trend higher as the breakout leg of the 1982 SPX comparative did. Should the uptrend reestablish itself, we would consider it a major positive proxy for the balance of growth X-Europe and primarily driven and smoothed by US demand and Chinese stimulus. Color us skeptical to say the least. 

 *  All stock chart data originally sourced and courtesy of www.stockcharts.com and the Federal Reserve Economic Database
*  Subsequent overlays and renderings completed by Market Anthropology
*  A labeling error on the previous Silver:Gold/SPX Performance charts was corrected this week from: 03/17/00 to 03/24/00. The data was always accurately derived from the weekly high on 03/24/00

Friday, March 15, 2013

A Few Thoughts From the Top

Almost 13 years to the week, and barring a major outperformance by the silver:gold ratio today - the equity market sell signal that we have been following since the start of the year should trigger at the close. This will be the first inversion 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 (as measured from the start of the secular bear market in equities that began in March 2000), this has indicated the start of another cyclical leg lower in the equity markets.
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Despite the erosion noted in the ratio, silver has actually outperformed gold since the lows recorded last summer. This was not the case up until the most recent decline that began in January. Considering the surge in risk appetites in the equity markets over the past three months, this dynamic, although not typical - makes sense. It is our expectations that the ratio will continue to rollover - with silver taking the baton on the downside.  
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Below is an update of the 1992 Nikkei comparative (not extended - for further explanation see, Here) that we have utilized since last summer to guide us through the pivots in silver. And although we have recently followed set-ups in the currency markets closer for added color (namely the euro) - we couldn't help but notice it appears to be profiling the turn once again.  
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Based on both the long-term secular comparative of the US dollar and the more nuanced roadmap of the euro in the Mirrored Pivot - the currency markets are taking breaths in trend where we would have expected them to. 

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The SPX is currently above its long-term hinge at 1542. It is our expectation it will once again respect resistance through the balance of March and retrace some of the most recent gains. 
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We will be closely watching the Shanghai Composite Index over the next few weeks to see if it continues to roll-over - or rekindle the trend higher as the breakout leg of the 1982 SPX comparative did.  
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*  All stock chart data originally sourced and courtesy of www.stockcharts.com 
*  Subsequent overlays and renderings completed by Market Anthropology