My 2014 “Predictions”

Let me just start out by saying that year-end predictions don’t mean a thing. The big firms give their year-end targets, fund managers talk their book, the blogosphere weighs in, and anyone with a twitter handle has an opinion. But if the data changes, what are you going to do, stick with your predictions and lose money? No, if things change, you make adjustments. There should be a worst case scenario exit before initiating any position, at any point in the year, not just on December 31st. So what does a prediction even mean anyway? To me, it’s what I see right now heading into January. And that’s it.

So now that we’re clear, here are a few things that I’m expecting as I see things right now:

  • Crude Oil prices double in Gold terms. $CL_F/$GC_F currently at 0.08 – goes to 0.15+.
  • Interest rates see 2% before 4% (10-year).
  • Corn Rallies 30%.
  • Blackberry doubles in Price.
  • And Lebron ends the regular season shooting 50% better from the field than Carmelo Anthony

Let’s take each one by one.

The first is the price of Crude Oil doubling in Gold terms. This is something I wrote about two weeks ago. You can go back and read that post to look at longer time frames, but here is the daily chart showing a key breakout after a six month consolidation. I can see this ratio getting above 0.15 from the current level of 0.08.

12-31-13 wtic vs goldFrom a risk management standpoint, I would not want to be long this ratio below those mid-December lows. But for now it looks great.

Interest Rates see 2% before 4%. I’m looking at this one from a contrarian standpoint. I’m noticing that everyone is convinced rates are heading higher and the secular bull market in bonds is over. You can see it in the sentiment data. And even with the Fed announcing the beginning of a taper two weeks ago, which is the first time they’re not trying as hard to keep rates down, interest rates haven’t really risen. In fact, rates (10yr) are still struggling to get above those September highs near 3%. With sentiment this negative, and rates failing to rise on “good news”, I think there’s a good tactical buying opportunity down here in bonds.

12-31-13 tltLooking at the Bond ETF $TLT, I would not want to be long below the lows from the second half of the year:

Corn Rallies 30%. This one is a combination of a lot of things. Corn has been one of the biggest losers of the year and is in a vicious downtrend. Looking at longer-term charts, there is some support down here at current levels. From a short-term perspective Corn is in the middle of its best seasonal period of the year, Momentum has turned positive while prices have put in new lows recently and sentiment is near bearish levels not seen since 2009, just before Corn prices almost tripled. Considering how bad Corn has acted over the last 18 months (down over 40%), a counter-trend bounce here could be powerful.

12-31-13 cornFrom a risk management perspective, Corn is still in a downtrend and that needs to be respected. I would not want to be long below the November lows, but I would also feel much more confident owning Corn above the shaded area on the chart – mid 440s. This one still has some work to do, but I think the potential is certainly there.

Blackberry doubles in price. This is a volatile stock to say the least. After a nice rally in 2012, the stock has been in a vicious downtrend throughout the year. But the bounces have been powerful. I was on Bloomberg TV earlier this year talking about a potential bounce to trade, and we got a really nice one. I think based on some positive momentum divergences and just the pure hate out there for this name, there could be more to this rally than what we’ve seen so far. I’m looking at those summer highs:

12-31-13 bbryManaging risk is much tougher with this one. That’s what I don’t like about it. I think short-term if you have to be long, keep things tight. I wouldn’t want to own this if prices are below last week’s lows. Down there things get a lot more messy. It’s much cleaner to me if this rally holds and consolidates up here.

Lebron ends the regular season shooting 50% better from the field than Carmelo Anthony. I think this one is pretty clear. Lebron James is the most efficient basketball player in the game. He hits just as many field goals a game as Carmelo, but it take Melo 32% more shots per game in order to hit that number. As great basketball players tend to do, I believe Lebron continues to improve as the season progresses and gets ready for the playoffs. But as the Knicks continue to struggle, I think Carmelo will try to do more and therefore be even less efficient in the second half of the season. And don’t tell me that it’s because Melo takes more three point shots. They make the same amount per game, but Carmelo has to shoot more of them. I can see Lebron shoot over 60% this year and melo down near 40%.

No risk management here because if I’m wrong, it won’t cost any money!

***

pre·dic·tion  (pr-dkshn)

n.
1. The act of predicting.2. Something foretold or predicted; a prophecy.

Call them what you want, predictions or otherwise. To me, it’s what I see right now. If they work, great. If not, well that’s why we have a risk management process in place. I always try to think worst case scenario. Sometimes it’s easier that others. In most of the cases listed above, I think the risk/reward is skewed in our favor. And to me, that’s the most important thing.

Check out the rest of the 2014 Predictions from the Stocktwits Community

 

Tags: $CORN $ZC_F $TNX $TLT $CL_F $USO $GLD $GC_F $BBRY

13 Technical Signs That Preceded Major Tops

There are only a couple of days left in this record year. Anyone who has called for a major top in the US Stock Market at any point in 2013 has gotten it wrong. There have been some short-term shorting opportunities for sure, especially in individual stocks, but a major top in the S&P500 has been no where to be found. My friend Mark Arbeter over at S&P Capital IQ sent me his list of technical signs to look for that have preceded many major tops in the past:

But first, here is the simple reason why we look for technical signs, and ignore everything else:

“The Law of Supply and Demand is universally recognized in both academia and the business world as the foundation, the starting point of all economic analysis. The Law of Supply and Demand states that when demand for a freely traded commodity exceeds the supply of that commodity, its price will rise. And, if the supply of that commodity exceeds the demand for it, the commodity’s price will fall. Notice the lack of equivocation. No mights or coulds or shoulds, just will. It’s the Law. And, since common stocks are a freely traded commodity, their price movements are dictated by the Law of Supply and Demand – the starting point of common stock analysis (and, therefore, stock market analysis). As such, it is difficult to imagine why it is not at the core of every investor’s portfolio strategy.”

With that, here are Mark Arbeter’s technical signs to watch for next year:

1. Major topping pattern such as a head-and-shoulders or double top that takes many months to trace out. Not seen yet.

2. Increase in price volatility, both on the upside and downside. This would be part of the topping formation. Not seen yet.

3. Internal divergence with respect to the NYSE advance/decline line. Generally, A/D line tops months before prices. Basically, a move to extreme selectivity by investors. Not seen yet.

4. Internal divergence with respect to NYSE new highs as a percentage of issues traded. Currently being seen.

5. Weekly momentum divergence(s) on the major indices. Not seen yet.

6. Very steep price slope or blowoff move of major indices. Could happen with a very hot group. Not seen with the overall market, but being seen with social media stocks.

7. Weakening relative strength from small and/or midcaps vs. “500.” Currently seeing minor divergence with both small- and mid-caps.

8. Sentiment is the one area that is issuing a warning, but it has been for quite some time. We think these indicators are moving to their secular bull range from a secular bear market range. We think a price correction that resets sentiment back to neutral or bearish would be bullish from a longer-term perspective. Investor’s Intelligence bulls are now at 59.6%, highest since October 2007, while bears are at 14.1%, lowest since March 1987.

9. A period of distribution during a period of a couple weeks. Heavy volume selling of individual stocks as well as the overall market. Not seen yet.

10.Topping action in the relative strength leaders. Not seen yet.

11. Spike in Treasury yields. Not seen yet.

12. Low priced stocks, or those below $5, catch fire. Some evidence here.

13. A move to a very big round number after many years of rising. That is S&P 500 running to the 2000 level, which is only 8.6% above current prices, or the DJIA advancing to 20,000, which is 21% above current prices.

 

 

Source:

S&P Capital IQ Global Equity Research

Tags: $DJIA $SPY

Can Crude Set A Record High Yearly Close?

As we approach the last couple of trading days of the year, there’s something interesting going on in the Crude Oil market that doesn’t seem to be getting much attention. We could be about to see the highest yearly closing price in history. In fact, looking at yearly candlesticks, 2013 already put in the highest low for the year on record. Higher lows and higher highs is the definition of an uptrend right? Especially on a closing basis?

My pal Greg Schnell over at Stockcharts.com put out a note yesterday pointing out how close we are to setting record closing highs for the year. If Crude Oil can finish up above $99.20, it will surpass the 2011 closing price and will go down as the highest annual close ever.

Here are the yearly candlesticks going back 10 years. Notice the candle from 2008 where Crude Oil made all-time highs yet closed the year down in the 40s:

12-27-13 wtic annual candles

This has certainly been a fascinating development. I mentioned the bullish Crude Oil to Gold ratio last week, and now we’re looking at the long-term chart putting in higher lows for the year and potentially setting a record high annual close. This has been a boring, sideways, frustrating market for several years. It’s something I’ve actually stayed away from for the most part, fortunately. But it’s looking more and more like a breakout to the upside could be coming, both on an absolute and relative basis. The $110-115 level has been key resistance for a few years now in the price of Crude Oil. A breakout above that should set the stage for a retest of the 2008 highs up near $150.

This is something we’ll be monitoring closely in the beginning of the 2014…

 

 

Source:

Market Message Dec 26th 2013 – Greg Schnell (Stockcharts.com)

Tags: $CL_F $USO

 

Three Cycles To Watch in 2014

We hear about stock market cycles all the time.

We can look at short-term stuff like the annual seasonal cycle for U.S. stocks. For example, we are currently in the best three-month period of the year: November – January. We are also towards the beginning of the best six-month period of the year: November – May.

We can break it down even further and talk about the Santa Claus rally that typically comes late in December. But today, I want to focus on some of the longer term trends that seem to be coming together in a nice way.

The first one is the Presidential Cycle that represents the standard four-year presidential term. The second one is the Decennial Cycle that tracks stock market behavior for the 10 years of each decade. And the third one is the longer-term Secular Bull and Bear Market cycles.

Presidential Cycle

The Presidential Cycle is one that we take very seriously. We’ve taken a look at every U.S. presidential term since 1929. We are currently finishing up the “post-election year” and about to enter year two, or the “midterm year”. On average, year one tends to be a positive one peaking somewhere in the fall. The midterm year historically isn’t one of the best. The theory behind this is that presidents tend to get off to a good start making promises and keeping everyone happy. Then they take care of the dirty work that rubs the public in the wrong way. And then the final two years tend to be extremely positive as presidents prepare for their own reelection, or to help their own political party.

The reasoning behind this is less important than the actual performance statistics, but fun to think about either way, even for me. Currently, we are in the early stages of the worst 13-month period of the entire four-year (48-month) Presidential Cycle. The reason I think this is important because both the pre-election year (2015 in this case) and the election year (2016) tend to be the best periods of the Presidential Cycle. We took it a step further and differentiated between Republicans and Democrats and found very little difference in the results. I thought that was interesting.

So this particular pattern is telling us to take advantage of any major correction next year. Remember the end of the worst 13-month period of this cycle is next September.

Decennial cycle

The decennial cycle, or decennial pattern as it is sometimes referred to, is an important one for us. It takes into account the stock market performance in years ending in 1,2,3 etc. In other words, we are currently finishing up 2013, which is the third year of this decade. We would include this year with 2003, 1993, 1983, 1973 and so on. Next year represents the fourth year of the current decade and has a decent track record. The average return for the Dow Jones Industrial Average since 1894 for the fourth year of the decade is 9.23%, but positive just 66% of the time. That’s not very conclusive.

The piece of the puzzle that I consider to be more reliable here is the fact that next year sets us up for what is considered to be the most bullish year of them all: year 5. The statistics for the fifth year of the decade are staggering. Since 1895, the average return for year 5 is a humble 28.9%. But what really stands out is the hit rate. Every fifth year has been a positive one for the Dow Jones Industrial Average 11 out of 12 decades. And that one down year was 2005, where the Dow lost just 0.61%. The decennial pattern is certainly suggesting that we take advantage of any major correction in 2014 to do some buying.

Secular trends

The third cycle that I think is worth discussing as we enter the new year is the pattern of Secular bull and bear markets; “secular” meaning 10+ years, rather than shorter-term cyclical bull and bear markets that take place within each bigger secular trend. A consistent topic of conversation among technicians is whether or not we are already in the next secular bull market. I’ve never seen such a smart group of market participants so split on one particular topic. I think we can all agree that the secular bull market of the ‘80s and ‘90s peaked in 2000, where we then entered a secular bear market. Notice how within this last secular bear, we did have a cyclical bull market between 2003 and 2007 sandwiched between crashes.

With that in mind, the average secular bear market going back over 100 years lasts about 17 years. If we are still in this “secular bear market”, we would be entering year 15 this upcoming April. I understand that we have already exceeded the 2000 highs in most of the major U.S. stock market averages (nominal, not inflation-adjusted). But I think it’s important to keep in mind that in 1980, the S&P500 was finally able to break out above its secular bear market highs of the 1960s and 70s. That “breakout” turned out the unsustainable and fell 28% to the final cyclical low in August of 1982. So historically speaking, although I am still in the camp that 2009 marked our secular bear lows, it would not be unusual to have one more cyclical decline before we can confirm that we are in the next secular bull market.

Taking all three of these cycles into account heading into the new year, I think we can agree that all of them suggest buying the next cyclical decline aggressively to prepare for the next long-term secular bull market.

 

Source:

Three Cycles To Watch in 2014 (MarketWatch)

Tags: $SPY $DJIA

They’re Not Having Any Fun in China

New highs across the board here in the good old US of A. Everyone is all pumped up for this Santa Claus rally that seems to be coming. What a way to end the year for the US Stock Market. Even Japan, the Grand Marshal of this year’s parade is hitting new 52-week highs late in December. So we got S&Ps up 30% this year, Japan up over 50%, but China couldn’t be more of a loser (down over 6% YTD). They either just didn’t show up or they weren’t even invited. What a disappointment from the Chinese.

12-23-13 usa japan china

None of this is a secret. Since the beginning of the year, this group has underperformed the USAs, Japans and even the Europes of the world. “Emerging markets are submerging”, has been the joke around The Street throughout 2013. But just when you thought that it couldn’t get any worse for China, I think it just did. It’s not getting much attention, but this breakout two weeks ago in the Shanghai just failed miserably. And as long time readers know, From false moves come fast moves in the opposite direction…..uh oh!

Here is a chart of the Shanghai Composite attempting to breakout of the downtrend that it’s been in all year. You can draw it a number of ways, as you can see I did here, more conservatively or aggressively. But any way you look at it, this is one ugly picture. As the US and Japan are finishing up a year for the record books, China can’t get out of its own way:

12-23-13 ssecAnd to make matters worse, look at the RSI bearish divergence as it attempted this breakout. Not good. And now the Shanghai is taking out key support and looks terrible. The only way for these guys to get going is to take out the recent pivot highs. This isn’t something I’m counting on, but it really would be a very bullish development for China. Until then, however, there’s nothing to talk about on the long side.

Look at this thing making fresh lows relative to the United States:

12-23-13 ssec vs spx

 

 

Tags: $SSEC $NIKK $SPX $SPY $NKD $DXJ $EWJ $FXI $ES_F $NK_F $NKD_F

Crude Oil Breaks Out Relative To Gold

There have been some really interesting developments in this particular ratio. This week, and more specifically Wednesday and Thursday, Crude Oil has been attempting a monster breakout relative to Gold. In other words, Crude Oil priced in Gold (as opposed to US Dollars) is taking out key resistance levels and looks to be heading much higher. This could come from Gold continuing its disastrous decline, Crude Oil finally getting going, or perhaps, and more likely, a healthy combination of the two.

Here is the daily chart showing the recent breakout:

12-19-13 cl vs gcYou can draw your downtrend lines from the July highs any number of ways. But regardless of how aggressive or conservative you’re drawing your lines, it appears as though the breakout is on.

Now taking a step back, here is the weekly chart showing a much longer time horizon. Look at the importance of the recent support found this Fall in the ratio.

12-19-13 cl vs gc weekly

I love it when both the daily and the weekly charts are telling the same story. I’ve been watching this pair very closely this week, but I don’t see it getting a lot of attention. The majority of the commentary I see on The Street is about the Gold disaster, and not how Crude Oil is ripping relative to it.

The one exception has to be my buddy Jonathan Krinsky over at MKM Partners. Him and I look at a lot of the same things in a lot of the same ways. So I wasn’t surprised in the least bit when he hit me up this week regarding this ratio. Here’s what he had to say:

“The ratio of Oil to Gold is pushing above 0.08, or the highest level since September. Momentum of the ratio (RSI) is approaching overbought at the 70 level, so we will likely get some pause as the ratio approaches 0.085. However, this looks like a chart we would want to be buying on dips (i.e. long Crude/short Gold). Gold might try to find support at 1180 in the near-term, but given the fact that it is under a declining 200 DMA, anticipating that level will hold is a tough game to play.

Looking at a weekly chart of the ratio going back ten years (2nd chart), we can see the long-term base, followed by a breakout and re-test of the breakout point. This suggests the trend of Crude relative to Gold is quite sustainable going forward. Further, RSI on the weekly timeframe is far from overbought.”

This is an interesting one; don’t sleep on it. Remember, we don’t always have to own things in dollar terms. This is America, we can use any denominator we want. So although you can argue that, “Gold is not a currency, it’s just another asset“, it doesn’t matter. In this case it is the currency. Any denominator you use is the currency. So the ‘gold is not a currency’ argument is completely irrelevant here, because it is.

Stay tuned…

 

Tags: $GC_F $CL_F $USO $GLD

What Does January Mean To You? (2014 Edition)

This has become somewhat of a tradition here on Allstarcharts. Every year as we enter the month of January, I like to go over why this is such a powerful and predictive period. You see, the name January comes from Janus, the God of the Doorway, also known as the God of Beginnings and Transitions. Typically the results from this month reveal a lot about what we should expect going forward. Here’s my list:

janus

The January BarometerAs the S&P500 Goes in January, So Goes The Year. When the month of January records a gain, as measured by the S&P500 Index, history suggests that the rest of the year will serve as a benefactor, and finish in the black as well. Since 1950, this indicator has an incredible 89.1% accuracy ratio. This number also includes 2013, as January closed the month up 5% and the S&P500 is on pace to finish very much positive for the year.

Down Januarys Serve as a Warning – According to the Stock Trader’s Almanac, every down January for the S&P500 since 1950, without exception, preceded a new or extended bear market, flat market, or a 10% correction. 12 bear markets began, and ten continued into second years with poor Januarys. When the first month of the year has been down, the rest of the year followed with an average loss of 13.9%. In most years, these declines later provided excellent buying opportunities. For example, 2008 was the worst January on record and preceded the worst bear market since the Great Depression. But 2009 proved to be one of the greatest buying opportunities in American history.

First Five Days in January Indicator –  On average, this one has a very good track record. The last 41 UP first five days of the year have been followed by full-year gains 35 times for an 85.3% accuracy ratio. This includes 2013 which had a 2.17% rally in the first 5 days. The average gain for the first 40 of those years was 13.6%. It looks like 2013 will close up nicely and improve that average. The results are less reliable when the first 5 days in January are negative, showing just a 47.8% accuracy rate and an average gain of 0.2%. Going forward, I think it’s important to note that in Midterm Election years, this indicator has a spotty record. According to Jeff Hirsch, of the Stock Traders Almanac, In the last 16 Midterm years only eight years followed the direction of the First Five Days and only two of the last nine (2006, 2010). The January Barometer has a better record in Midterm years.

The January Barometer Portfolio – The Standard & Poors top performing industries in January tend to outperform the S&P500 over the next 12 months. According to Sam Stovall, if on Feb. 1 you invested equally in the 3 sectors that posted the best returns in the month of January and held them until Feb. 1 of the following year, you would’ve received a compound rate of growth of 8% as compared with 6.6% for the S&P 500 (through 2012). If you bought the worst performers in January, you would’ve underperformed the market with a 5.5% return. Since 1970, the compound rate of growth for the 10 best-performing sub-industries based on their January performance was 14.3% as compared with 7.3% for the S&P 500. The best-performing sub-industries in January went on to beat the market in the subsequent months 69% of the time, so nearly 7 out of every 10 years. The worst performing groups outperformed the S&P only 38% of the time. This indicates to us that you’re better off sticking with the winners in January rather than the losers.

The January Effect – As I mentioned on November 25th, this is the tendency for Small-Cap stocks to outperform Large-Caps in the month of January. There are plenty of theories about why this is the case, but as a lot of us already know, this phenomenon now begins in mid-December. The stats don’t lie: from 1953 to 1995, small-caps outperformed large-caps in January 40 out of 43 years. But the shift into the mid-December starting point really got going after the 1987 crash. According to Jeff Hirsch, the majority of the small-cap outperformance is normally done by mid-February, but strength can last until mid-May when most indices reach a seasonal high.

Santa Claus RallyIf Santa Claus Should Fail To Call, Bears May Come To Broad and Wall. That’s the old saying. Nearly every year Santa tends to bring a short rally to the stock market within the last 5 days of the year and the first 2 in January (7 trading days total). Since 1950 the S&P500 has averaged just over a 1.5% gain over this period. Last year, this period returned over 2%. But as the old saying goes, it’s when Santa doesn’t bring home a rally that we should worry. Weakness during this time of year tends to precede bear markets or times where stocks could be purchases later in the year at much lower prices.

***

As we do every year, we’ll go over all of these again in February to see what sort of conclusions we can come up with based on the results. I hope that I was able to make Janus proud and open the door a little bit into the world of January. The Stock Traders Almanac has very good tools for this sort of data. Sam Stovall from Standard & Poors, who came up with the January Barometer Portfolio theory is also a great source.

 

Tags: $DJIA $DIA $SPY $SPX $ES_F $YM_F $IWM $RUT

Interest Rates Not Rising After Fed Tapers

At two o’clock on Wednesday, the Federal Open Market Committee announced they would be pulling back on their bond purchases. Even if it’s just by a little bit, this is the first time we’ve seen the federal reserve ease up on the gas. Although they are technically not raising interest rates, this “taper”, if you will, is bullish rates. You can’t argue against that. But interest rates are flat to down after the announcement.

It feels like the old buy the rumor sell the news sort of scenario. Treasury bonds are already at or near multi-year lows. And sentiment is at major bearish extremes. So as I mentioned on Monday, crashes typically don’t come when everyone is expecting one to come.

bonds uncle samIf you take a look at a chart of US Treasury Bonds, prices are at very important support. It’s almost like if this level doesn’t hold, bonds actually could crash. There’s that much downside before the next levels of support. But with everyone expecting it, can it actually happen?

In a scenario like this, I normally like to take the other side of that. The unwind out of extremes in sentiment can make for very powerful moves. In this case, it’s the “obvious” end to a 30+ year bull market in bonds and a new secular trend higher in interest rates. I personally don’t think it’s that simple.

I’m still in the camp that as long as bonds hang on to these lows since August, a major rally could be coming. There are just too many bears out there. Take a look at the Rydex Bull Ratio at just 5% right now. Look at Consensus Inc published by Barron’s each week currently at 32% bulls. They’re coming off extreme lows not seen since early 2011, just before a 40% rally in the iShares 20+ Year Treasury Bond ETF ($TLT). Look at the Commitment of Traders report – the speculators are dumping bond futures as fast as they can, while the smart money (the commercials) are loading up on Bonds.

So the Fed is telling us that they are trying to pick on interest rate a little bit less than they have been. What in theory is bullish for interest rates seems to be somewhat priced in. At least that’s what bonds are telling us (so far). I find this development to be fascinating.

Watch these recent lows in Bonds. If they can somehow hang in there, we should see a monster rally in Treasury bonds as rates come off. It’s a tough trade and no one seems to be on the long side. This combination of key support along with historic pessimism is the recipe I look for. Add the risk/reward ratio which is clearly in the favor of the bond bulls and you have JC’s favorite trade.

This is still developing…I’ll try to follow up on this post soon.

 

 

Tags: $TLT $ZB_F $TNX $ZN_F $IEF $TBT

Tom Fitzpatrick Presents For the MTA

Monday night we had the privilege to see Tom Fitzpatrick of CitiFX present at the New York City chapter of the Market Technicians Association. We’ve really had some great speakers lately and have a killer line up for the first few months of next year. If you haven’t attended one of these meetings and are in the tri-state area, make sure you keep an eye on the calender for details on future events.

I thought Tom did a great job and was more than willing to stick around for a few minutes afterwards to answer questions and fill in any missing pieces. Here are a few things stood out to me from his presentation:

Fitzpatrick likes US Dollars. He thinks they rally from here in a similar way as the mid-90s and early 80s. In his opinion, the Dollar Index rally is going to come from a combination of $EURUSD weakness down to 1.20 and then parity and continued weakness out of the Japanese Yen. Here is his US Dollar chart where he compares the current price action to prior periods:

12-17-13 fitzpatrick

Another interesting chart that he brought up was the correlation between consumer confidence and US Equities. It’s easy to see how Consumer Confidence tends to peak just prior to stocks as seen in 2000, 2007 and just recently this summer. One of the things that worries Fitzpatrick about US Stocks is that with each new cyclical high in the stock market (2000, 2007, 2013), consumer confidence has been putting in lower highs:

12-17-13 fitzpatrick cons cond 12-17-13 fitzpatrick cons cond2

His thoughts on interest rates stood out as well. He pointed to how many double tops are seen in this long-term chart of 30-year yields. He thinks yields pull back which should spark a rally in bonds prices, and if the October lows in rates are taken out, it would confirm a double top that could really send bonds soaring. Although bigger picture, he believes rates go much higher, they show some short-term vulnerability:

12-17-13 fitzpatrick rates

And finally Gold. Fitzpatrick sees the current Gold correction similar to what we saw in the 1970s: half way through the entire rally. His target above $3000/oz remains in place but should take several years to get there. He also points out that renewed strength in gold prices should coincide with weakness in US Stocks, again similar to the action in the 1970s. When asked about Silver, he reiterated that Silver should act as a more leveraged play on gold, in both directions.

12-17-13 fitzpatrick goldI asked him if he could see a situation where US and European stocks correct while the Nikkei in Japan continues to rally. He said he could absolutely see that and pointed to the years of US and European stock market rallies without Japanese participation. I thought that was interesting. The chart he currently has the most conviction on is the US Dollar. Of all of his “12 Charts of Christmas”, this is the one he feels most confidence about.

Great presentation across the board. Very well done.

 

 

Source:

Market Technicians Association – New York City Chapter

Citi Unveils the 12 Charts of Christmas (Zerohedge)

Tags: $DX_F $UUP $USDJPY $FXY $EURUSD $FXE $GLD $GC_F $SI_F $SLV $TNX $TLT $ZB_F $ZN_F $SPY $SPX $ES_F $DXJ $NK_F $NKD_F

Is This It For Bonds?

There’s a lot of pessimism out there in the bond market, specifically US Treasury Bonds. Is this it, should we all just assume that rates rip from here and bond prices see another leg down? Prices of bonds are hanging out near multi-year lows and the bearishness seen across the bond sentiment and bond allocation polls is off the charts.

Back in September, I was one of the biggest bond bulls out there. I loved them when no one else did. I expected decent rally but instead got little mini-rally. It was very disappointing. There was a big jobs report the morning of November 8th, and bonds got killed. That day I said that something changed, and I was no longer a bond bull. If the data changes, you change your strategy right?

Well over the last 5-6 weeks or so, bonds have consolidated nicely. They haven’t gone lower, but haven’t rallied either. They are possibly setting up for that rally that I expected in August/September, or they are about to take a massive leg lower. Here is what the $TLT looks like, representing the longer end of the curve:

12-16-13 tltI like the fact that momentum is trying to turn up as prices try to hang on to this key support. The line in the sand to the downside is clear.

Here is a longer-term weekly chart showing how much more downside we can see in bond prices if these lows cannot hold:

12-16-13 tlt week;u

Based on the combination of the constructive action in Bond prices over the last 4 months and the extreme pessimism in the space, I find it hard to be short right here. To me, crashes don’t come when everyone expects it. Now, when you factor in the weekly chart, it is easy to see how much down side there can be in bond prices. A break below these current lows for more than a day or two, and we could be in store for a huge leg lower.

Personally, I’m looking for opportunities on the long side, at least for now. There is an FOMC meeting this week, which could set the stage for the next move. I doubt either way that it will be a small one. So if you’re looking for action, this might be the place over the next couple of months.

 

Tags: $TLT $ZB_F $TNX

IBTimes Interview: Underneath The Surface

I had the opportunity Tuesday night to sit down and chat with Jessica Menton over at International Business Times. She was particularly interested on how I approach sentiment, seasonality and risk management. She pointed out to me that technicians, in her opinion, focus more on what and when, rather than the why. So she had me explain that a bit. I think overall, we discussed some pretty important topics.
 
 

 
 
 

Source:

Do Technical Signs Underneath The Surface Reveal A Correction? (IBTimes)

Tags: $SPY $DJIA $IWM $RUT $SPX

Taking Advance/Decline Line A Step Further

Over the last few months I’ve noticed a larger number of market participants interested in our old friend: the Advance/Decline line. I found that it was being used quite often as one reason to stay long and bullish since it was hitting new highs along with the major US stock market averages. If you don’t know, the A/D line is a measure of stock market breadth based on cumulative net advances. In other words, it takes the number of advancing stocks on the NYSE on a given day and subtracts the number of declining stocks. That number is then added to the previous day’s value, which creates the “line”.

While some have used this particular measure of breadth as “confirmation” of the uptrend in stocks, I’ve been pointing to another measure which has been diverging dramatically in the second half of the year. This is of course the Percentage of stocks trading above their 200 day moving average (or “in uptrends”) making lower highs with each new high in the market. But that’s not what today is about. You can go here if you want to read more about that one. Today is about that other measure of market breadth, the Advance/Decline line, specifically the NYSE Advance/Decline line.

Here’s a chart of what it looks like:

12-11-13 ad lineWe can start by pointing to the fact that the new all-time highs we’ve been seeing since last month have not been confirmed by breadth. You can see that better in this chart:

12-11-13 ad line shorter term

As disappointing as that might be, it’s not even what I’m concerned about. Which is why today I wanted to take the A/D line a step further and look at the momentum in this particular breadth indicator. You guys know how much I love to see my momentum to confirm price action. Fortunately for us, the McClellan family has already created an oscillator for us that calculates precisely what we’re looking for: the momentum in the Advance/Decline line.

Here is what the chart currently looks like. Notice how momentum in the Advance/Decline line peaked in September as both the actual A/D line and the S&P500 have continued to hit new highs:

12-11-13 mcclellan osciAnd just for fun, let’s take this even one more step further. Let’s take a look the Summation Index, which is basically a running total of the momentum in the Advance/Decline Line. Notice how we take a running total of Net Advancers to create the A/D line, and now we’re taking a running total of the momentum of that A/D line to create an oscillator. Although this is a cumulative measure of momentum in breadth, it is considered an “oscillator” because it fluctuates above and below a zero line.

In the chart below we can see how this cumulative measure of the momentum in market breadth is now 85% below its peak from May:

12-11-13 mcclellan summation

According to Sentiment Trader, this is all highly unusual. They are referencing the combination of the S&P500 closing at a 52-week high, momentum in breadth is below zero, and the Summation Index is below 200. The last 2 times this occurred came just prior to the 2000 and 2007 peaks in the S&P500. I thought that was interesting.

Now, let’s make no mistake about it. Everything mentioned above is only a supplement to actual price action. At the end of the day, it’s really the only thing that matters when it comes to managing risk. Breadth indicators as well as the derivatives of them are prone to error just like anything else, including but not limited to volume, seasonality, fibonacci, etc. We use these as price supplements to help manage risk. That’s it. I want to be perfectly clear about that. I feel too many assumptions are made regarding a lot of this stuff. And maybe not so much from my readers, but elsewhere for sure.

So I think this is just something to think about. Some of my friends have been talking about the Advance/Decline line lately, so I figured I’d weigh in. Any thoughts?