This weekend I did my regular global macro review. This is when I go country by country analyzing the weekly and daily charts of all of the stock markets around the world. Each chart includes a momentum study (14-period RSI) and a 200 period moving average that we use to help with trend recognition. I trade indexes all over the world, simply because I can. Why wouldn’t I? [Read more…]
This is a great piece from the desk of Tom Bruni @brunicharting
Approaching Tactical Bounces In Bear Markets
Going country by country all over the world is one of the best tools that we have as market participants. The value that I’ve gotten over the years from looking at the behavior of all of the countries, instead of just the U.S. is a huge factor in why I am such a top/down weight-of-the-evidence guy. There are signs of strength and weakness that we see from international markets that might not be so obvious in the S&P500, for example.
Last September, I promise you that the reason I got bullish tactically was not because of what I was seeing in the United States, but what was happening around the world. There were simply too many bullish momentum divergences and downside objective achieved internationally to ignore. Something was up, and in fact, the counter-trend rally that we got in the U.S. actually exceeded my expectations.
Last week we were focused on Emerging Markets falling to fresh 10-year lows relative to the S&P500. We are now hitting levels not seen since 2004 when you compare the MSCI Emerging Markets Index ETF $EEM with the S&P500 ETF $SPY. We know it’s a disaster, not a secret. But today I want to take a look at emerging markets on their own. We’ve seen this group trading in a sideways frustrating range for almost 6 years while U.S. Equities have exploded higher to all-time highs.
Here is a weekly chart of the MSCI Emerging Markets ETF $EEM breaking down below the lower of these two converging trendlines since 2009 and now testing the key support that has held for the past 5 years. The underperformance relative to the U.S. and the rest of the world, mentioned before, was warning #1. The break of the lower of the two uptrend lines was warning #2. And now we are here at the most important support level we can come up with on this chart:
Bigger picture emerging markets look terrible. It’s hard for me to make an argument against that. So for a more tactical perspective, we turn to the shorter-term charts. Here are the daily candlesticks with a 200 day simple moving average, that we use mostly for trend recognition, and a 14-day relative strength index for momentum readings:
We have broken the uptrend line from the lows in December. Over the past few weeks, prices have now broken support from those December lows. Momentum is hitting oversold conditions which is a characteristic of a downtrend, and therefore confirming everything price is already signaling. Price target-wise, I’m looking at that 33 level which represents the 161.8% Fibonacci extension of that entire December-April rally.
So how do we execute? Well with that downward sloping 200 day moving average and prices breaking all kinds of support levels, I am definitely in a sell any and all strength mode, especially if we somehow get back up towards 38-39, although I doubt we get up there any time soon. I would only want to be short here tactically if we are below the December lows and more neutral above that level. Target-wise, I would be covering tactical shorts under 33, which is still a long way down from here.
This is a messy market, both short-term and long-term. The underperformance really stands out, especially with fresh support levels breaking down.
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Tags: $EEM $SPY $EWT $EWY $FXI $EWM $RSX $EWZ $EWW $ILF $EPI
How about that for a headline? Did I get my point across?
I don’t know many participants who are positioned for Energy and Emerging Markets to rip in the second quarter as the US Dollar continues to weaken. And that’s a good thing. I don’t like crowded trades, and if anything, this trade is crowded on the opposite side of that, which I love. In addition to the sentiment data suggesting this, I’m seeing the fundamental sell side analysts lowering estimates on energy stocks talking about oil this and oil that. What I’m not seeing is discussion about energy stocks rallying on higher oil prices this quarter. Again, I love that.
Last month I was fortunate to have Crude Oil play out as I was hoping (see here). I had been staying away from oil for a long time and constantly answering the question of “Where is Oil going?” with, “I don’t know”. But I had a road map where if prices made new lows in March and momentum diverged positively, we could see a squeeze if prices were able to get back above the January lows. So far this is playing out in my favor. Let’s see if this continues to follow through to the upside.
To me, I think the more important development after last month’s market behavior is not even in Crude Oil. To me, it’s the highly correlated stocks, sectors and countries NOT making new lows in March as Crude Oil hit levels not seen since early in 2009. This bullish divergence between the equities themselves and the oil futures really got my attention. With sentiment hitting historic bearish extremes in both energy stocks and emerging markets, this unwind could potentially be epic.
First, here is the Emerging Markets ETF $EEM vs the S&P500. Look at the brief new low in this ratio last month as momentum put in a bullish divergence. This is one of my favorite combinations. But now we are also breaking out above a downtrend line from the September highs in this ratio. I think this continues into Q2:
This Emerging Markets ETF represents a specific basket with difference weightings. I would just like to add that not all emerging markets are created equal, and although they all should benefit from a weaker Dollar, there are a few that to me stand out as better risk/reward opportunities. Lately I’ve been pounding the table about getting long Russia, and so far this is working out well (See here). I think we have a date with the 200 day moving average near $20.50 and ultimately see $23 which was former support in 2011 and 2012. Look at all the higher lows in Russia since December as Oil put in lower lows:
It’s hard to be bearish on Emerging Markets when you have China exploding to highs not seen since 2011. We are quickly approaching our short-term target above 46 based on the 161.8% Fibonacci extension from the September/October correction, but ultimately I think we have much more room to the upside based on the breakout of such a large multi-year base:
Now look at the potential in Thailand and Taiwan. We want to be buying a breakouts above the downtrend line in Thailand. We also want to be buying a break above the 2011 highs in Taiwan. These don’t get much cleaner and the risk is very well-defined as we only want to own them above their overhead supply just mentioned:
Looking here in the United States, I like the energy sectors. None of them made new lows last month as Crude Oil did. I think all 3 mean revert back towards the downward sloping 200 day moving averages where I would be selling into that strength. Of the 3 here below, I think the E&P names look the strongest. Notice how last month prices got no where near new lows. Reminds me of Russia.
If you need a catalyst for all this, I think it’s further US Dollar weakness. Here is the post I wrote the day before the US Dollar hit its peak last month March 12, 2015. I’ve never seen so much unanimous love for the US Dollar in my entire career. That was crazy. Meanwhile, I was also pointing to the key Fibonacci extensions that were being hit on March 11th. This was the 261.8% Fibonacci extension of the January – February consolidation, and more importantly this level coincided with the 161.8$ Fibonacci extension of the entire 2009-2011 sell-off in the Dollar. It’s really when these Fibonacci targets cluster together that they get my attention. Here is the weekly chart:
I don’t think there are many out there positioned for this sort of behavior in the next few months. I really like this theme. I’ll do my best to follow up if anything dramatically changes in the coming weeks. Members of Eagle Bay Solutions already receive all of this in their inbox. Make sure you’ve signed up for the package that is best for you.
Tags: $RSX $FXI $SPY $XLE $OIH $EWT $XOP $CL_F $USO $UUP $DX_F $EEM $THD
One of the biggest themes for me over the past few years has been the consistent underperformance out of Emerging Markets relative to U.S. Stocks. This is the exact opposite of what had been such a nice trend for so many years. From 2003-2007 Emerging Markets were where you wanted to be, and not the United States. But since then we have seen a tremendous bottoming out of that trend where now it’s the US hitting fresh 9-year highs relative to Emerging Markets and it’s Latin America that is a big part of the reason for this struggle.
First of all, here is a long-term chart of the S&P500 vs Emerging Markets. We are using SPY to represent the U.S. and EEM to represent the MSCI Emerging Markets Index, which consists of 21 Emerging Market countries. These include China, South Korea, Taiwan, India, Brazil etc. Look at the nice bottoming process and structural breakout (and successful retest) earlier this year:
Next, here is the chart of Latin America vs Emerging Markets. We are using ILF which represents the S&P Latin America 40 Index which has 52% Exposure in Brazil, 30% in Mexico and the rest split between Chile, Peru, Colombia etc. Notice how we are currently hitting levels in this spread not seen since 2005:
The point of this ratio analysis is for us to get a structural perspective on where money is flowing. I’m not controlling Billions of Dollars (yet), but those that do move markets in trends like these. It takes time for a cruise ship to turn around; it’s a process. Same thing with Billions, or sometimes Trillions, of Dollars. Seeing these shifts in money flow and huge structural reversals like these are evidence of that shift in money flow. I think these trends are likely here to stay for now and see little reason to believe that emerging markets are where we want to be, particularly on a relative basis.
These are some bigger picture trends that I wanted to point out, but Members of Eagle Bay Solutions receive updates on these charts on a weekly basis, which also includes shorter-term tactical analysis. Make sure you’re registered to receive our Weekly Global Reports.
Tags: $SPY $ILF $EEM $EWZ $EWW $FXI $EWY $EWT $EPI
As you guys know I am constantly reviewing the price action from stock markets all over the Globe. To me, the S&P500 is just one index in one country on this giant planet that we call earth. I get the fact that the rest of the world looks at the United States as a leader and other stock markets tend to follow along in terms what happens in the Dow Jones Industrial Average and S&P500. But for the purposes of managing money, it’s just one asset of an infinite amount of liquid assets around the globe.
Looking at all of the global averages, I can’t think of one that is not in a downtrend vs the S&P500. Today I wanted to share two charts that I think are good examples of why America is the best in the business.
The first one is Emerging Markets as a group compared with the S&P500. The pair trade, if you will, would be long of SPY and short EEM. The iShares Emerging Markets ETF includes China, South Korea, Taiwan, Brazil, South Africa, India, Russia, Mexico and others. Look how nice this giant bottoming pattern has been over the past 8 years. Also notice the breakout above former resistance to start 2014 and now a successful retest:
The next chart compares the S&P500 with Europe. In this case, this pair is long SPY and short FEZ. The Euro Stoxx 50 ETF includes France, Germany, Spain, Italy, Netherlands, Belgium and Finland. Look at this consolidation over the last couple of years well-defined by these two converging trendlines. These symmetrical triangle sort of formations tend to resolve themselves in the direction of the underlying trend. And in this case that is precisely what has occurred. We are currently hitting fresh highs and it appears very clearly to me that the path of least resistance is higher:
These charts tell me that the United States of America is the best place in the world. Execution-wise, I continue to be a ‘buy the weakness’ guy for these pairs. Risk management-wise any failures where these ratios return back below broken resistance, and a more neutral stance would be appropriate. But from where we stand today, the US rules the world and should continue to head higher on a relative basis.
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Tags: $FEZ $EWG $EWP $EWI $EWN $SPY $EEM $EWZ $EWT $FXI $RSX $EPI $PIN $EEM
One of the standout losers to start the week has to be Emerging Markets. We’ve been watching this space closely ever since the failed breakout to new 52-week highs earlier this month. Whenever we see those, the opportunities that develop can provide us with very favorable risk/rewards.
Today we are going to focus on the daily bar chart of $EEM which is the iShares ETF that represents the MSCI Emerging Markets Index. This Index has heavy exposure in China (17%), South Korea (15%) and the rest in places like Taiwan (12%), Brazil (10%), South Africa (7%), India (6%), Russia (5%), Mexico (4%), etc.
Take a look at the failed breakout earlier this month. This is just another one of the million examples of the fast moves that come from failed moves. The problem that I see here is that not only are we entering the week breaking the uptrend line from the 2014 lows, but also key support from the lows in June and August:
Notice the bearish divergence in momentum as RSI failed to confirm any of the new highs in price throughout the summer. Momentum was warning us of a problem, and prices now seem to be confirming. I would say that to invalidate any of this negative action, I would want to see prices rally back above 43.50 without RSI reaching oversold conditions. But other than that, it looks like lower prices are coming.
Moving on to Emerging Markets on a relative basis, we are talking about a group of stocks that have been dramatically underperforming the US Stock Market for basically 4 years. Look at the difference in performance since the end of 2010:
Finally, here is a ratio chart of Emerging Markets relative to the S&P500 (EEM/SPY). Look at prices rallying back to former support last year and failing to ever break through. Now we are breaking uptrend lines and former support from throughout 2014. I don’t see anything to like here on a relative basis:
Trends are trending. Emerging markets can’t get out of their own way. I’ve set some parameters that would change my mind and make me more neutral in this space. But I think any of these positive outcomes are the lower probability scenarios. Nevertheless, it is important to recognize all possibilities.
I will continue to view the EM space negatively and will keep selling strength. There are some individual emerging countries that look better than others. But as a group, this is not somewhere we want to be in from the long side.
This week we are launching our Global Macro package that includes weekly updates on these charts mentioned above as well as 40 other individual country ETFs on multiple time frames (EWZ, EWG, EPI, EWC, EWA, etc). Email firstname.lastname@example.org if you are interested in this new package.
Tags: $EEM $RSX $FXI $EWY $EWT $EWZ $SPY $EWW
I don’t care who you are – Europe looks good. It’s probably not what you might overhear at a cocktail party, which we think is a good thing. But everyone loves to hate on Europe, so we’ll give them some love.
But the way we look at it is that if these big guys are heading that much higher, what about the little guys? In other words, if the better names do well, then the less “quality” / higher beta countries should do that much better right? There are plenty of examples, but let’s look at two of them quickly:
Austria’s high’s last year are over 40% from current levels:
How about Italy? 60% away from those highs:
Something to think about…
Tags: $EWI $EWO $EWQ $EWG $EWJ $EWT
To continue with our Bullish Asia theme from a few weeks ago (see China and Japan), today we move to the small island of Taiwan. We’re seeing some extremely constructive action out of this area and I’d be surprised if we didn’t see a breakout soon.
We’re looking at the iShares MSCI Taiwan Index ETF ($EWT). The key area that we’re watching is the range between $13.50-14.00. This level goes back to 2010, where we saw a little bit of consolidation before continuing higher. That same price level was the key support from that double top in 2011. The $2.25 or so measured move from that bearish topping formation took Taiwan down to $11.50, where we seem to have found a bottom.
Now here we are back at this $13.50 area. After testing resistance a couple of times last Fall, then again in March this year, and one more time in September, this is arguably the fifth test of the important level. As always, the more times that a level is tested, the higher the likelihood that it breaks. It looks to me like a breakout here is eventually coming and the target would be that double top from last year up near $16.
From a risk management perspective, we need to find a decent pivot point from which to trade off of. Right now there seems to be an awful lot of risk to the downside without a fixed exit point. We’re going to let this one play out and let it come to us. Perhaps we play the breakout and retest up near $14. And maybe we come back towards that 200 day moving average (red line) that may present us with a nice entry point. Either way, we want to know our out before getting in.
But the reason I bring this up is really because of the constructive action that we’ve seen over the last 15 months or so in $EWT. To me, it seems like a pretty solid base from where we could see lift off. This is not the kind of action that we’d expect to see in a risk-off environment for Stocks as an asset class. So we find this really interesting from a more macro point of view.
Tags: $EWT $TWN $TFC $TWON