Thursday, May 30, 2013

Butterflies at the Altar - Arson at the Fed

We continue to find ourselves walking in a strange parallel universe exploring the flip side of the long dollar / short euro thesis and wondering if a material pivot lower in the dollar is upon us. Could it just be nerves before a major breakout in the dollar materializes? Perhaps. We have watched these forces come together for some time - butterflies at the altar would be nothing new with these prospective nuptials. And while it has been quite good for us to have a strong read on the dollar and the euro's next move and see the kinetic potential throughout the commodity and currency markets - we recognize cracks forming in the relative strength of the dollar and conversely pressure building within the euro. We also have watched (actually foresaw) as corners of the commodity market - such as the gold miners relative to gold itself - have made an important turn higher this week.   
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Further buttressing the case against the dollar - and as we have noted over the past few weeks - silver appeared coiled with underlying upside momentum. In perhaps a first since its large pivot lower in May 2011, the euro's relative strength to silver may be result of a correlation divergence. The conviction of the jury is still out, but if we played devil's advocate to the asset relationship - that's how we would see it. 

The US dollar index comparative that we have utilized quite closely has provided an excellent road map of the dollar's potential and pivots - and a contrasting backdrop to the last time the index broke aggressively higher in 1997. What we have recently seen and pointed out is a notable divergence in the relative strength of the index as it consolidated and broke higher over the past several weeks. In terms of expectations of performance of trend - it's come up short. 
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You will often find with useful comparative wave or cycle analysis the assets acutely correlate coming through a major pivot structure and heightened volatility event - then closely trend coming out, before eventually diverging as either the analog or current market walks outside of what would be characterized as normal distribution. I have compared it in the past to lobbing a rock into a pond; whereas, the geometry of the disturbed surface will replicate with great congruency at the point of entry and dissipate as you move further away from the epicenter of disturbance. Granted, when the comparison is of the same asset you may also encounter and provide similar kinetic intermarket turbulences at the respective pivots. What we may be witnessing with the dollar - and as I pointed to last week is the trend stalling out and another trip lower through the range. 
"With only a few sessions remaining in May - the US dollar index is marginally holding above it monthly breakout ~ 83.50. As we see it, the risk here for dollar bulls and precious metals bears (both of which we have helped chair the Departments since April of 2011) - is the dollar becomes exhausted and similar to 1994 takes another trip lower through the range. All things considered - we still like the dollar, but remain vigilant and open to an audible lower for a spell." Between Mosquitos & Cicadas
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Just as the dollar showed significant positive "pressures" in early February (as expressed in the relative strength of the move), the euro is now potentially sitting on similar forces. 
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What's also interesting here and potentially worthy of extrapolating a bit of past drama - is similar to the failed breakout drive by the dollar in 1994 - the Treasury market soon followed lower with prejudice when the Fed began raising interest rates. Today, the catalyst for the Treasury market blaze appears to be arson as well; motivated by a Fed perhaps uneasy at the pace and character of risk appetites and boxed in by greater transparency and somewhat conflicting data. I suppose the strange silver lining is raising inflation expectations caused by a slouching dollar here wouldn't exactly be the worst thing in the Fed's eyes as inflation data continues to surprise to the downside. 

Strange bedfellows indeed - although par for this marriage. 
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*  All charts - with the exception of the GDX:GLD ratio comparative were constructed from the 5/29/13 close

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

Tuesday, May 28, 2013

Red Pill or Blue?

Click to enlarge image - from "Spooked" see Here
Click to enlarge image - From "Apple Reboots" - see Here



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

Apple Reboots

With news over the weekend of a fresh antitrust investigation of Apple's sales tactics by the European Union, we thought we would update some of the Apple charts from our more comprehensive note back in March (see Here) and give an opinion or two. 

Since removing our bearish bias in April with expectations of a countertrend bounce - the stock has stabilized and now has the potential to rekindle lost momentum with a material change in trend higher. While surprising as that may be, the momentum comparative with oil (circa 2008) that has kept us on the right side of the tracks since last December has pointed to this timeframe as a reversal. In 2009, oil made a long-term low some 32 weeks after its blowoff top. With Apple today, the most recent low was made 30 weeks after the high this past fall. 

The chart below now aligns the comparative lows with the respective momentum profiles. 
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As noted back in March, although not as severe a decline as encountered in oil's breathtaking unwind in 2008, the momentum profile and price structures of the build and breakdowns were quite similar. Namely, the frictionless and scarped declines - painted with positive RSI divergences. If the relative strength divergences sound familiar (see Here) - it's because the gold miners have walked a similar path.  
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Contrasting the two previous peaks which also culminated with parabolic runs by the largest market cap companies in the world, you will notice that both PetroChina and Microsoft were in similar performance glide paths at this point in time. While the equity markets in 2007 turned down with PetroChina, Microsoft peaked some 36 weeks before the broader market (SPX) finally rolled over. Although it is our expectation that Apple has made the turn higher - this week marks the 36th week since Apple topped last fall. 
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By many fundamental, sentiment and technical extremes, the equity markets should have slowed and corrected their historic ascent weeks ago. But as we have noted and for lack of a better description - it is what it is. Highsight 20/20, it appears the Meridian's demarkation between rational and irrational trends has lived up to its reputation once again.  
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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

Monday, May 27, 2013

A Golden Opportunity

In what has become a rite of spring for us - we emerge from the torrent well fed and docile. After feeding in the stream as precious metals bears for the better part of the year - we may even want to be their friends this time.

Although still looking for traction to take hold in the miners, the GDX:GLD ratio comparative we have highlighted since January appears to be tracing out a low with the divergent momentum characteristics we had expected.

All things considered - we'll let you know if nature gets the best of us and we decide to eat our new companions. Until then - consider us golden.  
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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, May 25, 2013

Shifting Sands

If you thought the past five years were tough (they were) - adapting to the next chapter is just as difficult. 

Broadly speaking, as traders - markets, expectations and causations are more apparent when the system is highly correlated. The cruel irony, is that so many financial professionals and products were hyping and selling the concept of diversification through one of the most highly correlated periods in market history. Hindsight 20/20, it was poor advice and timing. Without pulling any punches, perhaps Mark Cuban said it best back in 2011, "Diversification is for idiots." If there was ever a time to be tactically focused along the markets steep arc of traumas and recoveries, the last five years were your stage. With an embarrassment of emotions to exploit, the spread of potential outperformance was ripened to the vine. The unfortunate and counterintuitive reality is that most of the savviest financial professionals missed the harvest and brought down the baseline of performance - relative to the market - during this timeframe. The psychological and intuitive degree of difficulty was simply too high. 

Today - however, with the chains of correlations continuing to drop like Django from his burdened shackles, a higher degree of diversification makes greater sense to the average investor. If you don't have the time or the resources to find those corners of the market that are primed for outperformance, while mitigating the risk of underperformance and volatility - intelligently increasing diversification is a good idea. This isn't to say you should take an equal slice of pie from the markets major food groups. Like most things in life, diversification - in moderation. This dynamic of old will also likely be welcomed by hedge funds whom over the course of the last decade have failed to earn their keep in outperforming the indexes. As we transition through this period of diminishing and shifting correlations, the cream within the industry will likely once again rise to the top with more abundance and diversity. 

A few things we are considering in light of these shifting sands: 

Generally speaking, when assets become less correlated and stop moving in lockstep fashion - it isn't entirely wise to be strategically bearish towards the intermediate time frame. Across and within respective sectors and asset classes, the once typical correlations have continued to languish. While there is always a chance that we are simply in the eye of the storm so-to-speak, the considerable length of time that has passed since the correlation environment has shifted without resuming its previous dynamics - lends the argument to at the very least become more agnostic and opportunity driven on sides of the market we have avoided. 

As expected, the markets found the cascades in the currency and commodity corners (EUR, AUD, gold & silver) we had anticipated. While very much living up to our expectations of character, i.e: 
"...the risk continuum in this environment extends beyond normal distribution; i.e. - those looking at mean reversion strategies, either from an oversold price or sentiment perspective - may find themselves in a barrel cascading over the edge." The Cascades 3/2/2013 
- they have taken separate tributary falls to get to their current position. With respect to the great commodity unwind, this relative destructive interference of flows and lack of correlation even within the commodity sector itself has been received by the equity markets as net positive - rather than concern of a more disorderly tone. This likely explains why the equity markets since making their lows last November, have diverged considerably from the silver:gold ratio it has trended with since after the initial banking crisis in 1990 - and to a large degree - have discounted our concerns of disinflation and the ever present specter of deflation. The bottom line and where the rubber meets the road; in this environment, finding yourself on the right side of the currency and commodity markets has yielded little insight towards the equity markets.

Although our reflexes are to wince at reading, "Things are different this time", the context and reality still rings true. Considering the legendary source, we would all be the wiser to take note. 
"Things are different this time. We have been studying markets for more than 50 years and have found certain consistencies and patterns repeat themselves. While most of these simple approaches to market analysis worked quite well in the first three years of this cycle (aggressive leadership, sentiment extremes, regular periods of correction, breadth and momentum divergences, overbought and oversold extremes, six month seasonality, FRB variation in stimulus, etc." since last November the picture has been different. " Money Makes the World Go Round - Robert Farrell, May 5, 2013

Thursday, May 23, 2013

Between Mosquitos & Cicadas


Despite any obvious correlations, there is always information to be gleaned in comparative cycle work. What's past is prologue; a benchmark - and what's present can be contrasted with the past for bearings and innuendo within the current market environment. If your timeframes run longer than a life cycle of a mosquito, but less than a 17 year cicada  - ignoring the nuances of market history will likely result in the markets swatting such ignorance - as well as your wealth. Just as a historian places certain current events within a broader historical narrative for context, the same should be applied to the markets with respect to the basics of duration, performance and character. In a behavioral system that neither "creates or destroys" market psychologies - we have yet to find a simpler tool at remaining somewhat rational and grounded within the perception of at times an irrational construct. It is all uniquely - the same. 

With that said, here are a few updates of our Secular Tides concept we have commented on in a variety of iterations over the past two years. Although we have typically posted the RUT:SPX ratio in our weekly updates, for clarity purposes - we utilized the inverse (SPX:RUT) as it runs with the US dollar index. Like the previous turn in the 1990's, the dollar has led the pivot higher as the primary "tide" - with large cap stocks getting pulled higher relative to the RUT as the secondary tide.
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The most notable divergence today when contrasted with the dollar's last breakout leg during the first half of 1997 - was the considerable strength of the move as shown in its RSI. While the dollar's current momentum profile mimicked the previous cycle's range through April - it has recently diverged over the past month.
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With only a few sessions remaining in May - the US dollar index is marginally holding above it monthly breakout ~ 83.50. As we see it, the risk here for dollar bulls and precious metals bears (both of which we have helped chair the Departments since April of 2011) - is the dollar becomes exhausted and similar to 1994 takes another trip lower through the range. All things considered - we still like the dollar, but remain vigilant and open to an audible lower for a spell.  
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*  All stock chart data originally sourced and courtesy of www.stockcharts.com 
*  Subsequent overlays and renderings completed by Market Anthropology

Monday, May 20, 2013

Spooked

Spooked - is perhaps an understatement. Although considering the subject of late, it isn't entirely out of character. After momentarily blipping higher at the open, silver lost the floor and fell some 7% before reflexively bouncing and rolling over into the Monday session. It would behoove us to remember next time we consciously admit along the lines of, "Although running against our better judgements..." - we follow those instincts. But alas, there's no crying in baseball - and certainly not with silver.

Comfortably creatures of contrast and comparison, the nature of Sunday's open - both the Friday lead-in, rapid loss of cabin pressures and retracement bounce - was eerily reminiscent of how silver first ruptured back in May of 2011. With that said, the psychological underpinnings and capital comittments towards silver here are worlds apart and in our eyes simply don't merit chasing the downside. 
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* 4:00 pm EST Update: Silver ran up to the comparative's mid-day retracement pivot (see Here) and completed a violent upside divergence in mirrored fashion (see Here). All things considered, the precious metals - as well as their respective miners (see Here) look appealing.   
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What's also interesting - both in light of silver's Sunday swoon, the comparison with May 2011 and its typically leading relationship with the equity markets - is the comparative structures and now glaring motivations of the Fed's quantitative cow bell in both salvos. During the arc of QE2, risk appetites were indiscriminately (both commodities and stocks) motivated higher - initially by the telegraphed reporting of the Wall Street Journal's Jon Hilsenrath - and subsequently by Chairman Bernanke himself. This major asset run then culminated with a blowoff top first in the shallower ponds such as silver and then through the system's deeper waters.  
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While silver and the commodity and currency markets respective cascades have largely been ignored and qualified as just a change of guard and character - we continue to heed their warnings and consider the equity markets curling structure and driven behavioral bid by the Fed unhealthy to say the least. Notable, when even contrasted with the last time the equity markets irrationally broke through the long-term meridian in 1995.   
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As always - and perhaps more than ever - Stay Frosty
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*  All stock chart data originally sourced and courtesy of www.stockcharts.com and www.kitco.com
*  Subsequent overlays and renderings completed by Market Anthropology

Friday, May 17, 2013

Follow the Leader

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Over the past two years since silver peaked in late April 2011, we have used the asset as a leading proxy for the euro.  Back in 2011, silver broke its parabolic blow-off a few sessions before the euro pivoted down. Today, we believe there presents another example of this dynamic on a much wider timeframe; whereas, silver has led the move in breaking last summers lows - well before the euro. 
Keeping this leading nature in mind - and despite silver marginally breaking its April lows, we feel that it is trading more indicative of a base with more upside potential - than an immediate continuation of the downtrend that began last fall.  
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Similar to its leading relationship with the euro - we expect that the CRB continues working its way towards breaking last summers low.
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Headlining the week, the US dollar index accomplished a major breakout - very much along the lines of its previous breakout in 1997. 
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Remaining within the commodity and currency communities we have had the strongest reads on, the Australian dollar continued its free fall this week - just as the US dollar performed while ushering in the start of the now defunct commodity cycle. 
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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, May 15, 2013

When Doves Cry

While we don't expect the Fed to actually slow QE with inflation running around 1% rather than 2%, we could believe that a "taper" of some of the equity markets animal spirits might have been their best intentions last week. After all these years - and with enough glycerin on their faces, we doubt Bernanke needs a technical brief on what an unhealthy market looks and feels like. With that said and considering the disinflationary winds that have only grown stronger, the thought of applying the brakes while core PCE flirts with record lows is enough to make the doves cry. In the meantime, they've floated another trial balloon - which in contrast to last years failed dollar breakout and whispers of QE3 frames an interesting juxtaposition. For better or worst - they (the doves) are getting boxed in by an ebullient equity market. Having their cake and eating it to will likely prove a difficult task once again.   
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Below is the 97' dollar breakout comparative we have been following for some perspective on the last time the dollar actually broke out. 
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Monday, May 13, 2013

Risk Premiums


NDX & SPX 92' - 03'
Silver & Gold 99' - 13'
Although we remain in the bounce now/roll later camp with silver, we updated the ratio comparison of silver and gold we occasionally highlight to the Dot-Com Bubble in 2000. Our last updated of this series was done on October 2nd of last year as the precious metals were cresting following the commencement of QE3. This comparative contrasts the NDX:SPX ratio through the breakdown in March 2000 with the current silver:gold ratio. Despite typically providing leading barometric conditions towards the equity, commodity and currency markets, for this perspective the performance trend of the silver:gold ratio serves as a boom-and-bust signature of the asset class itself. Like the Dot-Com bubble that was pricked in 2000, the higher beta numerator (Nasdaq/silver) exhausted in parabolic fashion several months before the more conservative denominator of the asset bubble carved out a broad top (SPX/gold).     
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For comparative purposes, the study was normalized based on their respective momentum lows preceding (NDX:SPX 1/98 & SLV:GLD 10/09) each parabolic run. This inception point for the NDX:SPX ratio also became the retracement low of the bear market that followed the Dot-Com bust.  
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*  All stock chart data originally sourced and courtesy of www.stockcharts.com 
*  Subsequent overlays and renderings completed by Market Anthropology

Friday, May 10, 2013

Wag the Dog

Interesting times indeed - so much so, we find ourselves questioning certain biases as markets break higher against the backdrop of a slowing world economy. While we have always appreciated and respected the financial markets as the tip of the sword or perhaps for this analogy - a dog with a very long tail - we couldn't help but notice a growing currency appendage expressed in the Japanese yen that is once again wagging the equity markets in perhaps an unhealthy fashion. Considering the comparative prism we occasionally embody, you could make an argument it has shades of the disconnect found in 2008 where the commodity markets - driven by powerful currency moves (US dollar), went parabolic in the face of a rolling equity market and world economy. 

Today, we have the inverse dynamic with the equity markets seemingly grinding higher each week - driven by powerful moves in the Japanese yen in the face of a slowing world economy and commodity sector. Needless to say and similar to the CRB in the summer of 2008, should the yen run out of downside - we would expect the equity markets to correct with a reversionary vengeance. Food for thought, with what looks like another positive close for the equity markets this Friday afternoon.        
 
The euro continues to follow the exhaustion guideposts outlined in our ECB Hubris Meter chart - serendipidously arriving at "Truthful" subsequent to the ECB rate cut.
Although continuing to impression our currency biases, albeit consistently along a more patient timeframe - the US dollar appears ready to challenge last summer's high. 
In today's session, the CRB pivoted lower in a zone we had expected it to. However, we find it noteworthy that within a respective sector such as hard commodities, there continues to exist lagged correlations between asset moves such as the considerable bounce in copper this week - contrasted with what we perceive to be more compression potential in silver. 
Although running against our better judgements with respect to expectations in the dollar and the euro, we continue to see the next short-term move for silver to be higher.  
What became and exercise in attrition, the Australian dollar finally broke-down with considerable momentum this week. We have been waiting for this move as the bookend to the commodity cycle that commenced when the US dollar pivoted lower in the spring of 2002. 

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As a postscript, I was sad to learn of Alan Abelson's passing yesterday. He was a legend and model for me in how to succinctly, but creatively comment and present the story of the financial markets. His wry, yet poignant commentary always read in stark contrast to the monotonous and stale financial journalism of the day. I was immensely humbled when he took interest in my work and found his wit and wisdom ever present - such as his first question to me, "What's a nice boy like you swimming with the sharks?"

While I've wondered that for sometime, the truth likely lies much closer to the interest he instilled with his writings in contextualizing the sharks and their ever changing environment. 

Thanks for everything Alan - you will be greatly missed.