Wednesday, July 31, 2013

The Generals

Lead me, follow me, or get out of my way. - General George Patton

It's hard to be bearish when the markets "Generals" continue to lead the way higher. The banks led us down into the bear in 2007 and they have been leading us higher since the fourth quarter of 2011. While we were cautious as they approached long-term resistance this spring, in commanding fashion their performance has cleared the way higher.  

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Monday, July 29, 2013

Great Expectations

As we mentioned before in the wake of the last Fed meeting, not quite an apples to apples policy comparison - per se,  but one could make an argument that the reflexive behavioral jockeying by the Fed is worthy of some contrast, between the markets anticipation of the Fed's first rate hike back in 2004 and talk of The Taper today.

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That being said, and as we have spoken to over the past few weeks - the SPX has so far taken the transition in stride. Back in 2004, the equity markets largely consolidated for the better part of the year as traders wrestled with the transition by the Fed.  Considering the recent talk of once again moving the goal posts even further back and lowering the unemployment rate threshold now tied to the Fed's 85 billion a month asset purchase program, perhaps the equity markets ignorance is bliss attitude towards credit have served them well once again...

We find it interesting nonetheless that although the SPX comparatives trend profiles have basically run across the grain, momentum has unfurled in similar fashion.   
Below are a few other asset comparatives with 2004. Like the SPX, they were all fit based on the 10 year yield profile. 

Saturday, July 27, 2013

A Few Thoughts on Precious Metals & the USDX

A solid performance by precious metals, despite silver's give back throughout the week. Our expectations with silver have been for a gradual turn higher. All things considered, it has filled that bill and pattern. Over the coming weeks we expect silver to take the pole position and lead spot prices higher in the precious metals complex.  

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For the time being, the miners are carrying upside momentum by sharply outperforming both gold and silver. 
Worth noting is the rather muted performance by the U.S dollar index in contrast with gold's significant decline. This performance differential between assets was one of the reasons we began to suspect a weaker dollar over longer timeframes this past May. While gold essentially collapsed to and even beyond our expectations, the currency backdrop for the dollar and the euro were largely unchanged. 
Over the last two weeks the U.S. dollar index has pivoted lower where we had expected it would. It continues to trade in a replicating and negatively divergent broadening pattern. For the past four months the dollar has essentially been loosing relative strength while treading water.  The takeaway for us has been dollar strength will be sold until a material change in trend and positive momentum is displayed. 

Buttressing these perspectives, you can see where the RUT:SPX ratio diverged from the historic comparative we have followed over the past few years with a strengthening dollar. 
In the prior week, the RUT:SPX ratio exceeded its 2012 high. This is in contrast to the successively lower pivots the ratio had made during its previous cycle lower in the 1990's.

On longer timeframes as well, both the dollar and the SPX:RUT (inverse) now appear to be rolling over. 
Considering the dollar index failed to take the exit ramp north as suggested in the 97' comparative, the prequel through the lower range in 94' and 95' may serve as more prescient guides going forward. 

Wednesday, July 24, 2013

Rocks for Jocks

For lack of a better analogy, there's mountain building going on these days. Those dogmatic bears that continue to linger in positions and perspectives longer than they should are causing significant uplift, in what geologists call an orogeny

Oh behave, it's legitimate jargon - look it up.  

Metamorphism, subduction - they're just another fancy way to describe natures recycling process. However, for market participants today, it's the capital exchange from the bears that has helped contribute to the great deformation of the S&P's "crust" higher.  
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Although the equity and credit markets were hit this past May when chatter of a Fed taper began to grow, historically a less accommodative Fed marks the transition to a more resilient economy and a firm bid beneath the equity markets. We outlined these thoughts in June (here). Considering the rise that the equity markets have made subsequent to a less accommodative Fed (both 94'-00' & 04'-08'), the peak for this mountain - as irrational as it may be - could be significantly higher than most participants expectations. 
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Despite taking its time in carving out a base, Apple continues to follow the positive divergent momentum pattern in oil, circa 2008/2009, that we have used as a guide over the past year (see Here). We continue to like Apple going forward and believe it should again begin to run with the broader market. 
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This opinion is in contrast with the momentum break in Microsoft, circa 2000 -  that we have followed and highlighted from time to time. Although Apple's performance has loosely followed Microsofts's rise and breakdown in 2000, the momentum signature (as expressed in our oil comparative) is quite different. 
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Similar to oil and our recent silver comparative with copper (see Here), this positive momentum pattern leads us to believe that Apple will at the very least attempt to challenge its highs from last year sometime in the future. Considering Apple has mostly acted as an anchor with respect to the S&P's performance over the past year, a correlated trend with the S&P will contribute significantly to those forces building this mountain. 
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 As always - Stay Frosty - but keep things simple. This is basic stuff - rocks for jocks. 

Monday, July 22, 2013

A Crossover to "Value"

After going on sale for a third and final time at the end of June, the precious metals miners appear to be making a major crossover today, both the literal and figurative sort - to value. After languishing for the better part of two years in the performance basement, the previously described "value traps" (see Here) have opened above their 50 day SMA - a major accomplishment considering the last time was at the end of last October.  
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All things considered (see Here) - we continue to like the sector going forward. 

Friday, July 19, 2013

"just how bad the crash will be"

Assuming the SPX continues to put more daylight between itself and the Meridian, we expect these updates will trickle to a halt. For the moment the market has roughly a 7% cushion for the balance of July after backtesting support in June. 

Although we typically don't rely heavily on trend lines for perspective, considering the pivotal history of rejection and support at the Meridian - this one we closely follow. 

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Despite hitting the relief valve in May, the SPX is loosely following the last time it broke through the Meridian in May 1995. 
Rounding things out from the backside of the globe, here's a daily comparative of our Shanghai series. Considering Krugman's timing yesterday and choice of words;
"You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be."
- we cherish the opportunity to take the other side. 

Tuesday, July 16, 2013

It's always darkest...

Keeping in mind our note from last week that featured a contrarian perspective on China, we came across the latest BAML survey which paints a rather bleak outlook by fund managers on the ailing giant. So bleak in fact that sentiment among fund managers is in striking distance of the January 2009 low for the series. 

What's interesting to note as well is the sentiment crash is practically the mirrored equivalent of the massive and rapid rise in expectations that fund managers placed on China directly in the wake of Lehman. Pimco's "new normal" described in last week's note was born out of this exceedingly bullish sentiment environment when the intellectual and market zeitgeist looked to China as the torch bearer for the next stage and turned in horror away from the U.S. 

Needless to say - and reflected in the Shanghai composite's performance in 2009 and through today, the light burned bright then out. 
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Judging by these lopsided sentiment figures, another dawn is near. 

Monday, July 15, 2013

Reflationary Road

As expected, silver has taken its time in building out a foundation. However, once completed and as described by the historic momentum patterns shown below in copper, we expect silver to turn up another reflationary road towards its previous May 2011 highs. 

Assuming silver's historic leading relationship with gold - and by extension inflation expectations; participants current concerns with lack of inflation may be fleeting. 

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Friday, July 12, 2013

Meridian Market Update

Two possibilities given the interest rate backdrop and equity market structure, should the SPX fail at finding traction for a third time since making all time highs at the end of May. Certainly, we would consider the scale of the 1994 equity market cascade the more likely outcome. With that said, long-term support from the Meridian is now found ~ 1560 which was initially tested and held in June." Meridian Market Update 7/3/13
Considering the equity markets have not only found traction over the past two weeks but took out the May closing high in yesterday's session, we updated the series to provided further perspective of how the market has reacted with the Meridian in the past - both the rejections (1987,1994,2011) and the breakouts (1995,2013). 

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Whether it was Bernanke's primary intention or not, talk of the taper in May deflated animal spirits and took what we perceived to be an unhealthy market trajectory off trend. 
Although the spike in interest rates echos of 94', the equity markets have so far absorbed the credit shock in stride with just a mild correction. Moreover, when it comes to the markets dynamics with the Meridian, the rejection in 2011 and eventual breakout this year is akin to the stretch between 1994-1995.

Similar to the 95' breakout, the banks have led the charge higher in the equity markets through their respective long-term resistance.

For further context of why we look for perspective with the Meridian  - here is a quick video from last year:  The Maker