Over the past few days I’ve received requests from readers about my thoughts on Russian stocks. While I don’t particularly care about the US/Russia relations when it comes to picking stocks to buy and sell, it seems to be something of interest to a lot of people. So let’s dive in. [Read more…]
One of the benefits of it being 2016 is that global markets are more interrelated than ever before. We can take price data from the other side of the world and use it to take advantage of domestic markets in the United States as well as many other countries and asset classes. To purposely ignore what is taking place in markets around the world seems irresponsible at this point.
Today we are watching what Latin American stocks are suggesting for the next direction in Crude Oil prices: [Read more…]
In this week’s members-only letter we discuss the following topics:
- What Do We Do With The U.S. Indexes Now? S&P500, DJIA, etc
- The Best Trade In Precious Metals: Gold & Silver
- About That Squeeze Higher in Chinese Stocks
- My Favorite Energy Trade Today
- What Are We Going To Do About This Messy Bond Market?
- The Best Tech Stocks: Apple, Microsoft, Google or Facebook?
- What Does The Weight-Of-The-Evidence Suggest About Risk-Appetite?
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…]
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.
As far as stocks go, it’s hard to find a worse area than Emerging Markets to have been in over the past few years. We’re talking about a group of countries whose stock markets do nothing but underperform the U.S. and most of the other developed nations. More recently, they’ve been crushed on an absolute basis over the past 6 months. Although our initial downside targets were hit in August, I would expect the overhead supply and downside pressure to continue to persist.
In Early August, we took a look at the MSCI Emerging Markets Index ETF suggesting that a downside break was imminent. Below is an updated weekly chart of Emerging Markets breaking down below the lower end of the two converging trendlines defining its consolidation over the past 6 years or so. In addition, prices broke that $37 area that had served as support since 2010. The more times that a level is tested, the higher the likelihood that it breaks. After several tests of support over the past 5 years, that level finally gave way. It was only a matter of time:
Notice how on that breakdown in August, prices were able to hold on to the 61.8% Fibonacci retracement of the entire 2008-2011 rally. Although finding support near that level was a positive, it’s what we have to worry about going forward that has me concerned. All of that former support that broke over the past few months is now overhead supply. This has been a common theme I’ve been pointing out here in the U.S. stock market. The same problem can be seen in Emerging Markets.
Here is a closer look at the breakdown in EM over the past couple of months. Look at all of that overhead supply that is now going to be a problem going forward. On any strength into that level near $37, the sellers are just sitting there waiting to sell to you. This is the, “Please just get me back to break even” crowd that is holding on to all of this supply. In my opinion, this is simply way too much supply to absorb in the near term and a sustainable rally in Emerging Markets is likely not happening any time soon. This is definitely a ‘sell strength’ market, particularly towards $37.
In this chart above I also included a 200 day simple moving average. When prices are trading below these downward sloping smoothing mechanisms, especially one as long as 200 days, we know the intermediate term trend is still down. In addition, look at momentum plotted down below. We are looking at a 14-day RSI hitting oversold conditions. This is characteristic of a downtrend and we haven’t even put any bullish divergences to suggest a sustainable rally could be coming.
I see nothing to like here and all signs are pointing to lower levels. The best way to take advantage of this, in my opinion, is to sell strength, particularly above $36 if we get up there. I’m not suggesting we’re getting a rally to those heights, but if we do, I think it’s a sell. The original shorting opportunity came a few months ago. So I think ‘sell strength’ is the dominant theme here that we want to focus on.
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Tags: $EEM $SPY $FXI $EWY $RSX $EWZ $ILF $EPI $EWW
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
Last week I was over at Fox Business chatting with Liz Claman about the Russian stock market. I first starting put this out there on the first day of the quarter on Yahoo Finance. Since it was April 1st, I actually got some emails wondering if it was an April Fool’s joke. But nothing to joke about here, we starting buying as we came into the quarter so Fox asked me to come on and discuss. I like energy as a group, and Russian stocks move with oil (see here). I’m looking for these upside mean reversions to happen together.
Here’s the video in full:
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Tags: $RSX $RUBL $SOCL $TCEHY $SPY $USO $CL_F $XLE $OIH $XOP $RUSL $EEM
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
Thursday morning I was on the Benzinga pre-market radio show discussing our current market environment. I’ve been in a heavy cash position since March 20 so I am approaching this market from a very unbiased perspective. We get into a lot of intermarket behavior and sector rotation as we enter the second quarter.
Here is the audio in full:
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Tags: $T $IYZ $SPX $IWM $RSX $RUSL $USO $CL_F $XLU $IYR
This has easily been one of my favorite assets to hate on throughout 2014. Everything we look at continues to suggest that lower prices are coming, particularly from a structural perspective. Sure, we got a nice bounce this Spring and into early summer, but moves like that are a characteristic of structural declines, not bull markets. After peaking in 2011, Russia has not participated in any of the strength in equities that we’ve seen elsewhere around the world. In fact, the Market Vectors Russia Exchange Traded Fund is down over 50% since the top in 2011 while the S&P500 is up over 50% during that same timeframe. This is just a good example as to why we look at markets around the world. There are good ones to buy and bad ones to sell. Russia has been in the “bad ones” category for a while, and continues to be (see here for more).
The first chart we’re looking at is a relative strength chart comparing Russia to the United States. This is where we generally like to begin our analysis to figure out where the strength is globally and where the weakness is. It’s not hard to see that Russia is, and has been, in a terrible downtrend:
Now looking at Russia on its own, here is a weekly candlestick chart showing prices selling off every time they hit the downtrend line from the 2008 highs. In addition, we have a downward sloping 200-week moving average and prices now breaking the lows from earlier this year. A big warning sign was that in the most recent counter-trend rally that ended this summer, prices failed to get back up to that downtrend line. This market is so weak that it couldn’t even manage that:
After breaking that key support shaded in gray that goes back to 2011, prices are now trying to take out the lows from earlier this year. Anything below that key level (blue dashed line) and aggressive shorts make the most sense to me. Above those lows and neutral like we have been is likely best. I like my charts clean, and this is one of the cleaner ones around the world. Gold and Silver have been very clean charts as well, for example.
Target-wise I’m still eying that Fibonacci extension from the March-June rally this year. Just under 17 we have a 161.8% extension from the most recent counter-trend rally. I think that’s where we’re headed. If prices are back above the 2014 lows, all bets are off. But below that, and this seems like a risk/reward opportunity that still favors the bears and also in the direction of the underlying trend, which cannot be argued is, and has been, down.
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Tags: $RBL $RSX $SPY
This week we hosted a live event where we took a look at stock markets around the world along with other non-correlated asset classes to find the most optimal risk/reward opportunities. There was a lot of intermarket work done comparing international stock markets, to commodities, to sectors here in the United States and down to individual stocks and pair trades. Rather than going over my process, like in previous webinars, this video focuses more on the results of the process. There are some nice trends already in place, and other situations that are setting up nicely for potential positioning in the future.
This is how I approach the marketplace. I hope the video can add some value to your process:
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