Early Market Risk Sentiment

Early on, the risk sentiment looks to be pretty much confined to equities, at least as far as CONTEXT's ES model goes, which has been hitting deeper extremes of dislocation between risk assets' performance vs S&P Futures performance.

 CONTEXT is more important in regular hours as more markets are open than it is overnight, in any case a -14 reading as the model is significantly lower than ES, the model more or less gives a fair value for ES based on other risk assets that typically move together in a risk on move. What this tells us is that those other risk assets are not following ES/stocks.

 The ES 1 min intraday divergence is a bit worse than pre-market.

 The ES 5 min chart has a nice divergence, if this were near the end of day I'd be looking at a weekly SPY put for tomorrow.


 NASDAQ futures 5 min were positive overnight, but they too are in a position that I'd be looking at a QQQ weekly put if we were closer to the end of day.

The 1 min intraday NQ chart.

I won't bother with the charts yet, but I'll update our Leading Indicators/Risk Assets.

Credit in the HY Corp is underperforming, so is Junk Credit and HY credit, HY Bonds (HIO) and Yields are underperforming. Commodities are underperforming.

As for currencies, the Euro isn't providing support, the $US Dollar is a bit stronger so it's out of line with the market, actually the market is the one out of line.

The only supportive metric at all is some slight weakness in the Yen, but not enough to make this a market I would trust for a minute.

SPY in green vs the Yen in red, the Yen is a bit weaker, but look at former weakness last week and where the SPY was.

It looks like there's no support at all in this market, perhaps it's just a little front running before the minutes tomorrow while they can as the last minutes really upset the market.

AAPL For a Quick Day Trade

If you are up for it, it looks like AAPL is going to make an upside move, probably a day trade type of move, but nonetheless. It's not my cup of tea, but....

UNG Quick Update

Sometimes taking some off the table in a position like UNG (even though they are calls and I have an extremely low tolerance for pullback/consolidations or loss of momentum in options), people start to wonder whether I've changed my mind about a position and especially UNG which I really like as a long term play.

I believe when the April Calls were mentioned last week, both the advantages of a short term or longer term move were touched on, it was kind of a win/win either way. I haven't changed my mind on UNG, I don't have doubts, it really says more about my thoughts on leverage than anything. IF you think about it, that 2 day trade is worth more than the entire move in the S&P-500 over the last 8+ months if you bought at the very bottom and sold at the very top with a lot less exposure risk.

So here are some UNG charts, both short term and long.

 Last week UNG was really looking like it was getting ready to make a nice move to the upside, this is why I'd prefer a little leverage, although if I was establishing or filling out a long equity position, I'd like that area just the same.

 As for today, UNG was bumping in to very short term resistance and left a gap below it, this market has been ruthless about filling gaps the last several years like I've never seen before.

 UNG's intraday 1 min chart was losing momentum as well as price being at near term resistance.

 As far as a little longer term and this being a decent looking bottoming area, this 10 min chart's positive posture looks good.

 On the daily chart we've looked at this last head fake breakout a lot of times and the gist is, it looks like UNG needed to pullback and gather energy before it makes the move to the next stage, ark up.

On a long term 4 hour chart, the trends become clear, the yellow arrow is that head fake area with a negative divergence and the pullback has a leading positive divergence, so I can't see how I cannot like this one, especially here.

UNG Follow Up

I liked the idea of April Calls in UNG because it works for short term momentum like a 3+% move today in which you can extract a nice double digit return in two days and let the trade work longer term.

The way I see it, a 3+% move this early is good momentum that you don't get often this fast with something like UNG so it's worth taking some of that momentum money, however I still like it longer term. Ultimately though my sites are fixed on UNG as a long term long position and I'd rather not have leverage except in a couple of key areas where it makes sense to take advantage of momentum moves.

Here's the return...

With a fill at $1.08 that's almost a 25% return in about 2 days.

I'll cover UNG's longer term prospects, but for now, that bit of momentum was hard to ignore, once you start losing it, you start losing that gain.

Taking 50% off the Table in UNG Calls

Market and TICK's Early Push

After a 3-day weekend, the opening activity is typically a bit crazy, lots of orders sitting in various places.

So far I see the TICK opening strong at +1000 but fading to zero. There are several momo favorites that are starting to get mired in much after a strong start. Some of the C&D trades I'm interested in are just not looking very good right now, they look more tired than their usual springy look, perhaps they'll brighten up after the a.m. trade has burned off.

Futures

Here are ES and NQ as of just after the open...

 ES- the green arrow is the European open, there's a 1 min negative divergence in to early US trade.

The same is apparent with NASDAQ futures.

What Did I Miss?

After a 3-day weekend in the US markets? Surprisingly little. Overnight the German ZEW investor confidence poll was higher than expected, but that's the trend everywhere.

In China the Shanghai Composite saw the second day off steep losses after the return from the Lunar new year. Also for the first time after eight months of pumping money in to the economy, China is now draining it out, they pulled the sink stop today as signs of inflation that tore through the country as well as the MENA region in 2011 started to rear its ugly head, expect more liquidity draining, not RRR cuts like CNBC predicts whenever the subject comes up.

A couple more companies like Nestle were caught in the horse meat scandal.

Europe is waiting for the election results from Italy due out Sunday or Monday and most importantly the F_O_M_C January minutes come out tomorrow so pretty much you didn't miss anything.

Other than that, there's surprisingly little movement...The major currency pairs have barely budged from this week's FX open.

Both ES and NQ have slight pre-market negative divergences going in to the open.

Happy President's Day

For those of you leading a normal life and involved in the markets, today is just another day, for those of us leading an abnormal life by making our living in the market, today is actually a day off, imagine that!

I wasn't too interested in early commentary today as for all intents and purposes, today is an almost irrelevant day except for the fact that China is back after last week's holiday due to the Chinese Lunar New Year that saw China out of the market all last week, I believe it's the year of the snake.

While I find things like the StockTrader's Almanac and such historical correlations interesting, for the most part it stops there. I recall quite a bit of bad press for the Year of the snake, for instance, according to Capital-IQ, of the 12 Lunar New Years, the year of the snake is the only one that the S&P has a losing record.

So is this some tin-foil hat conspiracy theory or is there something to a 66% losing track record?

So far China's Ministry of Commerce said that spending during the week long break grew at the slowest pace since 2009; well of course that's only one data point and in my view, far, far removed from Technical Analysis, but I do wonder about mass psychology? After all, there would be no Stock Trader's Almanac if there weren't these incredible similarities that are useful enough that they are worth noting, which brings me to the question of a self-fulfilling prophecy in the most populace nation on the planet?

I don't mind people thinking whatever they like about what I'm about to say, but I do believe 100% that we absolutely have control of events via our perceptions. Most of you know I'm not shy about sharing my personal experiences, probably because I feel like so many of you are as close as family or really great friends so I'll offer a couple of examples that I have witnessed in my own life and if it has no practical use for you in the market, perhaps it will be of use to you in a much more important way, your health.

Example #1 I had a grandmother who was teased, harassed or whatever you might call it by my grandfather, he told her nearly every single day, "Louis, when I die and they autopsy me, they're going to find a brain tumor and you are giving it to me".

At the age of 55, guess what my grandmother died of? Yes, of all the things it could have been it was none other than a brain tumor.

Example #2 Several years back some of you remember we had a small family cafe, my mother worked there 7 days a week (she's incredible, one of the hardest working people I've ever seen and I'm so proud of her), but she started saying, "This place is going to give me cancer". My wife and I begged her to stop saying that as I truly believe we have some measure of control over our health through our mind/body/soul connection.

After about a year and a half we decided to sell the Cafe, and a month before we found a buyer, guess who got cancer for the first time in her life? Luckily it was removed and she's healthy to this day, but we all kind of just share silence when it comes up and have the same thought.

I have a lot more examples, but I think the point is made and there's no reason to go on and on, so is the Stock Trader's Almanac a form of self-fulfilling prophecy? Or how about the year of the snake? I wouldn't give it that much credit alone, but I do think it will have some effect.

Europe...
I wouldn't have written this bit alone if it were not for the next story being what I wrote last night about bubbles, the F_E_D and the notion of, "This time it's different".

Overnight, which is about 3 a.m. EDT as the European markets open, Germany's Central Bank, the Bundesbank (the German Central Bank has more influence inside the ECB than any other) board member Andreas Dombret said the ECB must begin to withdraw its emergency policy measures as soon as an exit is justified, and warned that leaving interest rates low for too long can fuel asset-price bubbles.

This last line is ironically exactly what most of last night's post was about in a few conversations with member's over the weekend regarding the nature of bubbles. Bubbles never seem to strike twice consecutively, for example after the Tech Bubble (which may have been the most justified bubble of all-can you imagine life now without the Internet or your smart phone?) wasn't followed up by another Tech bubble, but was followed by an out of left field "Housing Bubble". On an interesting side note, I can and have shown charts of the Home Builders under massive accumulation during the 2000 bear market, someone knew the next big things was going to be housing and they knew it years in advance.

I'd argue that we are in another bubble right now, it's less specific, it's an asset bubble fueled by the very things Dombret warned of and that's what I was pointing out last night.

We know that the market has overtaken the 2007 highs in almost every average, the market is well above the 2005 highs which was a time when the market and economy were expanding due to consumer spending (much of it from appreciating home values, but expanding nonetheless).

So when we look at the market where it is today, we have to ask the question, "Are we in an asset bubble?". The obvious answer is yes, nearly every metric proves that.

Many in the market can tell you the unemployment rate as released by the BLS, few though are aware there are 6 different categories of unemployment tracked by the BLS and the one that is the headline release is the U-3 category defined as,

" People who are without jobs and have actively looked for work within the past four weeks."

And there's the slight of hand, if you haven't looked in the last 4 weeks (as many are discouraged and have given up, but would like to work), you aren't counted as unemployed.

Even using the headline U-3 number, take a look at the employment picture since 2007...

Since 2007 and with the market at pre-recession levels, the employment picture is till bleak despite unprecedented government stimulus, numerous programs and unprecedented F_E_D policy accommodation, we've thrown everything including the kitchen sink at unemployment and still are only half way there using the U3 metric, which may be the most generous.

Using the BLS's broadest measure, U-6 defined roughly as, "Part-time workers who want to work full-time, but cannot due to economic reasons ". In other words, if you would like to work a 40 hour week, but can't find a job to provide it, and you work for even 1 hour a week, you are in the U-6 category which also includes U-3 through U-5.

The U-6 rate is at about 14.4% while U-3 is roughly at 7.9, however... as Shadow Government Statistics points out, the rate is likely much higher as they track the rate with the additional, "Estimated long term discouraged workers who were defined out of official existence in 1994."

With their additional long term discouraged workers, who are no longer counted, but are still there and still unemployed, the estimate is near the Great Depression peak of 25%, which was measured in similar fashion.

Additionally, just like nothing in the market is static, it's the same for statistics and since 2007 the US has added 16 million people to the population...

What does this mean? It's another statistical gimmick to make the unemployment rate look better than it is...

While the population increased by 16 million , the work force (light blue line) as admitted by the BLS increased by a small 1.6 million. If the labor participation rate had kept up with the population growth, the U3 number would be around 11% instead of the sub 8% we see now. The explanation? The baby boomers are retiring at a faster pace, even though the baby boomers I know including family have seen their savings and any interest based income reduced to virtually nothing, it can't even keep up with the cost of inflation, much less the deflated value of their savings and the non-existient interest derived from that; this has led many that I know to have to return to the work force to make ends meet, not exactly the mass exodus to retirement given as the excuse for the disparity, but don't take my word for it...

 It's only in the baby boomer category -aged 55-69 that has seen actual gains of 5 million since 2007 while those from 16 to 54 have lost 8 million, there goes the baby boomer retirement argument.

I'm not going to get in to all of the economy charts, but I think we can take the GDP trend as a proxy as well as the employment picture.

The last GDP reading was the first sub-zero print since the 2009 recession, one more sub zero print and the US enters a double dip recession, yet the Stock market is coasting along at these highs?

The plain, simple and obvious answer...

F_E_D assets ince 2007 in billions.

While many things about the situation since 2007 are new territory, there are some old familiar themes playing out in this cycle that may help you understand the market moving forward and the economy, one thing I found interesting was the announcement of QE3 didn't spark a rally, it seems much of it was priced in before hand, but as you'll se there are additional factors in play that make every dollar of new QE less effective than previous Easing cycles.

I have been asked by friends and family if the 10, 20 and 30 year bonds they bought and still hold will see a default, my answer is, "Not likely", as a practitioner of Keynesian economics, the US has no gold standard, nothing backing up the value of the $USD except, "The Full Faith and Credit of the United States", a default would be devastating, but that doesn't mean those investments were wise or will even break even. First, those investments not only need to keep up with taxes and normal inflation, they need to survive the debasement of the Dollar. Say your Aunt Mildred bought $5000 worth of treasuries 30 years ago, the government was figured out a simple way to make the investment whole, but still rob the bank, debasement of the currency. Putting the interest aside because I don't think it can compare, look at it this way. The first house I bought had neighbors who had been there for well over 30 years, while we payed $95k for the house, they had bought the same homes 30 years ago for $3500 to $5000. When your Aunt bought those bonds, they could have bought a small, brand new house. Because of dollar debasement (even more than inflation), what can she do with the $5,000 paid back at maturity? She couldn't even use it as a down payment, but 30 years ago that money was worth a lot to the government, today they get to pay it back at a value that is near worthless; this is why I say the interest income is almost a moot point when taking this big of a loss in purchasing power.

 So, "No, I don't think the US will default as it's reputation is the only thing backing the debt, but they've worked out how to pay it back at near worthless values".

Where are we in the cycle? 

1) When massive private and public sector debts result in a credit collapse and recession, the efforts to pare down the debt is deflationary.  I think the housing bubble brought us to the credit collapse and QE brought us to the deflationary stage, at least as the value of government debt/$USDs go.

2) Financial institutions are willing to lend to only the strongest borrowers…This is called a “liquidity trap” and it is very difficult to extricate from. I think we've already seen several stages of this.

Public and private debt peaked at about 385% of GDP in 2008 and is not much better now.  Over time it has taken more and more debt to create a given amount of GDP growth, and when debt is declining, as it must, it is difficult to get any growth at all….

Now we can get some idea of where we are in this cycle and this weekend's dealings with the Japanese at the G20 are a perfect milestone on this chart's cycle.

Over-Investment and Excess Demand can be easily defined as the Housing Bubble, that was naturally followed by Excess Capacity, followed by Weakness in Pricing Power (in large part this is due to the F_E_D's extraordinary accommodative policy actions), Devaluation has already ran it's course, now we are in Competitive Devaluation as the G-20's failure to deal with Japan is indicative of the nations of the G-20 all pretty much doing the exact same thing, how can they throw rocks at their own glass house?

As mentioned last night, the race to the bottom in devaluation of a nation's currency as we are seeing right now, is a form of trade war, so what comes next, the actual trade wars and Protectionism has already been noted in the Euro-zone, what is supposed to be a free trade zone has already seen border controls put in place, most of it having to do with labor thus far, but just wait. When we pass below the dotted line is when deflation sets in and economic pain becomes unbearable. Several EU nations are a bit further down the line here, but it is a path that has been set long before the credit implosion even began.

This is in part why the F_E_D's efforts to do more will accomplish less and F_O_M_C members are already aware of that as was clearly stated in the last minutes released, this week we will see the most current minutes. Members are realizing that they are at the point where additional asset purchases have less and less of an effect, while the build up that must be unwound through the normalization of policy is now taking on excessively dangerous levels of balance sheet expansion that will not produce more pain when policy is normalized than gain in the present environment. In essence, the payoff now of policy accommodation is not equal to the pain in the future as policy is normalized, this is why F_O_M_C members discussed this very topic in the minutes from the previous meeting and discussed the benefit vs the cost as well as going so far as to look at the option of ending the asset purchases sooner and making them smaller. 

This was all becoming plainly evident on Sept. 13, 2012 when the F_O_M_C started to move from date guidance to the much less predictable "Economic Conditions" policy adjustment, it introduced uncertainty and that was the start of what thus far culminated in the last release of the minutes in which they were talking about the benefits of QE vs the costs.

Without getting in to all the specifics which are what I would call the , "This time is different" rationalizations, just think back to the market in 2005 or so, everything was humming along, the general public wasn't aware of any major emergencies unfolding, things were good and the SPX was in the 1200 area, now consider the economy not just in the US, but pretty much worldwide and remember the SPX is above 1500, just from a common sense point of view, does that make sense?

I know why we are here, I know what all the, "This time its different" reasonings are, but for over 400 years of bubbles, every one had a "This time it's different" and it seemed reasonable, it held water for a while, until it didn't.


 

Happy President's Day

I wanted to remind you that tomorrow US markets will be closed in observance of President's day.

In some other brief notes, first here's the schedule for the coming week, it starts out light and picks up some steam from there with the F_O_M_C_ minutes due out this week on Wednesday, this could be a pivotal event, the last release of the minutes caused the market some trepidation, we'll see what these bring.

The G7/G20 brought about the same lame duck events that were expected, Japan was lightly chastised over their currency devaluation which was little more than words that amounted to a slap on the wrist as just about every other G20 member is doing the same, Japan is just ahead in the game.

What is interesting as I spoke with some member's this weekend about the nature of bubbles, is the defining feature of every bubble I've studied back to the Dutch Tulip Craze of the 17th century, with an excerpt from Wikipedia:

"At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble"

There are some great stories and interesting events such as a man who paid the equivalent of about $100,000 today for one bulb, only to find out a sailor had mistaken it for an onion and ate it. The craze was caused by a virus that had infected the tulips and created spectacular colors, men made and lost fortunes overnight trading bulbs they had never laid eyes on.

In any case, in keeping with the tone of my discourse, there's one defining feature of every bubble and that is the words, "This time it is different". I recall them very well during the housing boom and all logical thoughts, but all the same, the hallmark of a bubble.

I had also talked a little about how many believe the F_E_D is what makes "This time different", however almost all bubbles have ended abruptly and in ways few had imagined in strange corners that were the end of a chain of cause and effect events, again, ending in ways in most cases that most would never have imagined. The F_E_D is unchartered waters with this type of policy accommodation, there's a split at the F_E_D and F_O_M_C because of this very situation, that is why the minutes will be more enlightening than the last policy directive/statement was.

One of the events of the G20 was the failure to stop a wave of currency devaluations which are a type of trade war. The one constant that has been observed when currency devaluations take place is the flocking to the reserve currency which is the $USD, so while other nations send their currency plummeting, the USD tends to rise as buyers move to the reserve currency. I probably don't need to point this out, but a rising $USD is bad for stocks for many reasons, just chart the $USD vs any major index and you'll see the inverse relationship.

As for the FX market's open this week... No big surprises

 The Euro has lost a little ground to the $USD...

 The Yen has obviously gained vs the Euro as the G20 didn't even amount to a paper-tiger, more like a paper-peacock.

And after what was said above, it should be no shock that the USD has gained in strength vs the Yen as well. Really, the $USD is the winner so far, this again is not good for equity prices as well as numerous commodities.

Equity Futures are open for a brief time, they'll close tomorrow with the rest of the market in observance of the holiday, tonight though they are little moved from Friday's 4 pm levels.

One thing we will be looking toward this week is the Cats and Dogs trade, many of you may recall it, the cheapest stocks, the Cats and Dogs of the market tend to do well right before a market turn south, the reason being new retail money, such as we have been seeing so far this year missed out on the initial move and are now stepping in the market ( a type of greed), but like all humans, they are looking for sale items and rather buy those than the high flyers.

I have thought about this a lot this weekend, it is evident in the Percentage of stocks 1 and 2 standard deviations above their 40 day moving average as well as stocks just above their 40 day moving average as all have declined severely over the last several weeks as I have posted several times, that the high flyers are being skipped over in favor of stocks on sale, the Cats and Dogs.

 If you look at the gains of the Russell 3000 vs the Russell 2000 (the smaller 2/3rd's of the R3K), you'll note the smaller cap index is doing better just as the NASDAQ Composite is doing better than the biggest of the NASDAQ components, the NASDAQ 100/NDX/QQQ. Yes, the trend is toward the smaller stocks, in essence, the "Sale Items", which has always done 2 things for us, act as a warning for the market and provided some very fast 1-3 day trades that pop from 10% to sometimes 100+% (average 30-50%) in 1-3 days and this is just the stock only, no options or leverage. However the season of the cats and dogs, something I've been documenting for at least 6 years and we have successfully played here several times, is short-lived, yet fruitful. I've already identified a number of these stocks, many have popped off already, but there are still some good looking plays available, as always, Take What the Market Gives, even if the season is brief.

Enjoy President's Day.