We held a free webinar this week to show off our new ChartBook and discuss how to best invest for 2016 using intermarket analysis. At All Star Charts, we use a global top/down approach in order to take the weight-of-the-evidence in Stocks, Commodities, Currencies and Interest Rates to come up with a theme. Once we have a major global theme, we will break it down to specific U.S. Sectors or Country ETFs and either buy or short individual ETFs or stocks to express our theme using strict risk management procedures [Read more…]
In this week’s members-only letter we discuss the following topics:
- How Is The Santa Claus Rally Coming Along And What Does It Mean?
- Which Markets To Buy Dips And Which To Sell Rips
- How High Can Natural Gas Go?
- Japanese Yen and U.S. Equities
- Gold vs Copper Ratio Still Trending
- U.S. Interest Rates and the Yield Curve Narrowing
In this week’s members-only letter we discuss the following topics:
- What We Need to See For Crude Oil To Bottom
- How High Yield (Junk) Bonds will Move in January
- What the Period of the Santa Claus Rally Really Means
- Is The U.S. Dollar Still a Short?
- How Crude Oil could affect Energy Stocks in the First Quarter
- What do we do with Uranium in 2016
For the past few weeks I’ve been writing a weekly open letter to readers about what I’m seeing across the stock market, bond market, commodities and currencies. The feedback I’ve received has been unlike any other time in the 5 year history of All Star Charts. I want to thank all of you for that. I think this is something that I will have to continue to do and make it a regular part of my routine. I’ve done this sort of thing in the past while managing money in order to keep our investors up to date on how we want to approach the marketplace. The format you’re seeing here is no different. Please feel free to keep emailing me and contacting me via Stocktwits or Twitter on how it can improve and what sort of things you guys want me to talk about.
Starting with the U.S. Stock Market, this as a group continues to be in no-man’s land. When price is near a flat 200 day simple moving average, the market is suggesting that there is [Read more…]
A big theme that I’ve been talking about over the past month is the overhead supply that we have across the U.S. Equities market. Not only are we seeing this in the major averages, but it is also visible throughout a lot of individual sectors and sub-sectors. The questions that I keep getting from investors and financial media revolve around at what point or price would I want to buy U.S. Stocks. The problem is that I don’t have the answer. You see, I’m not trying to buy stocks; I’m trying to sell stocks if we see higher prices. Rather than wanting to buy dips, I prefer to sell into rips. And if we don’t get any rips, then oh well, there are other asset classes and other areas to be both long and short that are uncorrelated to U.S. Stocks. It’s a big world out there. Here is the S&P500 below overhead supply:
The Energy sector and its sub-sectors are good examples as they hit all of our downside targets late last month. But even if we get bounces from these lows, we will run into the brick wall that is “overhead supply”. When key former support breaks down panicking the longs into selling, those that did not sell are now left holding the bag. That’s the “please just get me back to even” crowd that is sitting there waiting to sell to you. The E&P names are a good example:
The Industrials are another good example. Although our downside targets in the S&P Industrials ETF $XLI were hit last month, I would rather sell strength than buy these dips. There is very clear support in $XLI that goes back to the lows in 2013 which held again in the summer of 2014 near $48. Looking short-term, however, we are below all of that broken support that goes back to earlier in the year. This is now overhead supply that we want to sell into if we get up there. The weekly timeframe shows this well:
REITs are another good example. We are talking about a sector that broke its uptrend line from the 2011 lows. This was problem #1 and then on any attempt at an advance, prices successfully retested that former trendline support, and sure enough it then turned into resistance. At this point, our downside target has been hit based on the combination of a 200 week moving average and support from last October that had also served as resistance and support back in 2012-2013. The problem now is that all of this broken support in the mid-70s is still overhead supply. I’m not saying that we get back up there, but if we do, I would sell into that very aggressively. The weekly chart also tells the story well:
Healthcare is a sector where we’ve been expecting some aggressive selling over the past month (See: Is Healthcare Due For A Collapse?). Once we broke down below $75 we were thrilled to see prices crashing down. At this point, however, this is now fresh overhead supply from those that didn’t sell when they had to. We now want to be aggressive sellers into any strength back towards that area, if we get it:
There are plenty of more examples out there that I can point out, but I’d be here all day. Subscribers to our research have the entire list and receive weekly updates on the progress. You can register here to start receiving our reports.
I just think that looking for places to buy makes less sense than looking for places to sell. That’s how I see it. What do you guys think?
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Tags: $SPY $XLI $XLE $XLV $IYR $XOP
Last week all of the energy sectors that we follow simultaneously hit our downside targets. Subscribers to our research had been eyeing these downside targets for a long time and at this point we no longer see a reason to be short Energy, particularly on a relative basis. The sector ETFs that I am referring to are the S&P Energy Sector $XLE, Oil Services $OIH and Oil & Gas Exploration & Production $XOP. Going forward, I believe these sectors will outperform the overall U.S. stock market.
First, here is the Energy Sector $XLE which includes the big boys Exxon & Chevron. This is a weekly candlestick chart showing the consequences of that failed breakout last Summer. The old saying is that, “From failed moves come fast moves in the opposite direction”. It’s hard to find a better example out there. After a brief mean reversion earlier this year, prices broke down again and hit our downside target last week under $62. This level represents the 61.8% Fibonacci retracement of the entire 2009-2014 rally as well as support in 2012 that was resistance in 2010. Looking back further, this was also resistance and support in 2007 and where the crash really accelerated during 2008 financial crisis. There is a lot of market memory here:
The purpose of this write-up is specifically to point out why we believe Energy will outperform the S&P500 going forward. For me, it’s when we see bullish momentum divergences on multiple timeframes that it gets my attention. In this case, we are using a 14-period RSI to measure momentum, and in both timeframes, we are seeing higher lows while prices put in their recent lows to finally reach our downside targets. Here is the weekly timeframe showing Energy relative to the S&P500:
Here is the daily timeframe also showing a bullish momentum divergence:
Next we are looking at the Oil Services names $OIH. These are the Schlumbergers, Halliburtons and Baker Hughes of the world. Once prices broke the early 2015 lows, our next downside target was near $26, which was based on the 161.8% Fibonacci extension of the counter-trend rally in March & April. This target was hit last week and prices ripped from there.
At this point, from an absolute perspective, if prices can get above and stay above those first quarter lows, I think that would be a big step going forward. But again, we are more focused on these guys relative to the overall market. Like the integrated names mentioned above, we are seeing bullish momentum divergences on multiple timeframes on these recent lows. Here is the weekly timeframe showing RSI putting in a higher low while price made a lower low:
Here is the daily timeframe showing the same bullish divergence. I believe this will be the catalyst for further outperformance going forward, especially if we can get back above the first quarter relative lows:
Finally, we’re taking a look at the E&P names. This group includes the explorers and producers/refiners like Tesoro, Valero, Marathon and Phillips 66. Just like the the Oil Service stocks, last week $XOP hit the 161.8% Fibonacci extension of the counter trend rally in the first quarter. From an absolute perspective, I think those former lows will be trouble just like in the Services names so getting above and staying above that would be a huge deal. Again, we’re focused more on the relative outperformance going forward, so here is the weekly ratio of $XOP vs $SPY putting in new lows while momentum put in a higher low:
Here is the daily timeframe showing the same bullish divergences:
I think this is an interesting theme. It’s a combination of all of our downside objectives being achieved while momentum is showing bullish divergences on all timeframes in all 3 sectors. I think this can be the catalyst to get these going on a relative basis after struggling for so long. As far as the market itself is concerned, I’m still not a fan (See Here). I haven’t been (See Here) and things have gotten worse. There is just way too much overhead supply up here for me to get excited. So as far as U.S. Equities go, it’s looking for the outperformers to buy against market shorts that I’m mostly concerned with.
From a risk management perspective, these recent lows are big levels, particularly on a relative basis. If the recent relative lows are taken out and these momentum divergences fail, then all bets are off. This makes things easy on us because the levels are so well-defined. I believe this is the lower probability outcome, but we always want to keep an open mind. The weight-of-the-evidence, however, suggests that energy is where we want to be relative to the overall market going forward.
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Tags: $XLE $XOP $OIH $SPY $TSO $VLO $PSX $XOM $CVX $HAL $SLB $BHI
Now that we’re officially a third of the way through 2015, I think it’s a good time to reflect on what we’ve seen so that we can get a better idea of where we might be headed. I’ve taken a little bit of time off from the blog as we held very high cash positions over the past few weeks, but I’m back and want to share some thoughts.
As far as the major U.S. Averages go, I think structurally they all look fine and are still in strong bull markets. I find it tough to argue against that. From a more tactical perspective, these consolidations over the past few months look constructive to me and I would expect breakouts to new highs at some point soon. I won’t be loading up on Index ETFs or futures through; I think there are better opportunities within individual sectors.
A year like this is very frustrating for the passive investor who owns the averages and doesn’t take advantage of the overwhelming dispersion we are seeing between stocks as sector rotation has ruled the land so far. Look at areas like Energy, base metals and emerging markets for example, that were left for dead, absolutely dominating recently (see here).
One of the reasons we’ve held large cash positions the past few weeks is because a lot of our upside targets that we had coming into April were hit a lot quicker that we expected. It’s not a bad thing, but when targets are hit I think it’s important to back off. I still like this emerging, energy, base metal theme going forward, but I think it’s important to pick and choose our spots. The entries today are not as favorable as they were, say a month ago.
I’m happy to see the U.S. Dollar get crushed the past 6 weeks. I’ve never seen such consensus bullish US Dollar sentiment. That was nuts (see here). The easy money has been made on the short side here, but I think this unwind continues. The US Dollar Index itself hit some very important upside targets in mid-March (see here), so I’d bet it’s going to take some time for this to unwind. I would not be buying US Dollars for anything other than just a very very short-term trade. I like the others, particularly Canadian Dollars, which I have liked since they broke out in Mid-April. But just like in the sectors mentioned before, the entry point today is no longer as favorable as it was last month.
In the bond market, I am happy to see rates mean revert while bonds get hit hard. I’ve liked the Long Crude Oil / Short Treasury Bond trade and still think this mean reversion has legs (see here). The ratio in the USO/TLT pair, which allows you to express this trade using ETFs, is near 0.16 up 30% from the lows in March, but still a ways away from our 0.21 target.
Bigger picture, I still think interest rates stay down. Economists continue to get this wrong and since they don’t actually put money to work, they keep making the same wrong call over and over again. Meanwhile, the fed fund futures market which has been dead on this whole time continues to point to low rates. They are currently pricing in just a 46% probability of a rate hike at the late October meeting. I’m still in the camp, like I have been, that they do nothing this year.
Coal is an area that looks interesting down here. As these beat up sectors like Energy, Base Metals and Emerging Markets mean revert to the upside, Coal has participated a little bit but not as much as the others. I think we can see significant upside from some of these coal stocks. We’re paying close attention to this space entering the middle third of the year.
The Agribusiness sector has really caught my eye. When you look at a sector ETF like $MOO which seeks to track to Market Vectors Global Agribusiness Index, it’s hard to find a nicer base out there. Look at this index on multiple timeframes and tell me that a breakout isn’t going to be extremely powerful. The only thing that has held me back is the flat 200 day and 200 week moving averages. If these smoothing mechanisms can start to slope up, we want to be all over this space, particularly from a structural perspective. This index is loaded up in agricultural stocks like John Deere, Agrium, Monstanto, Potash, etc. This sector has my attention.
Globally, I’d say that a big theme is countries hitting our upside targets. When you look at China, Japan, Hong Kong, Philippines, Malaysia, Australia and Vietnam, they have already reached our objectives. So at this point, it’s hard to find good entries globally. I think a lot of easy money has been made around the world, so it’s hard to put new money to work here. I’d say one area we are looking at closely that has yet to take off on us is Taiwan. We’ll be watching these guys closely this month as their long-term smoothing mechanisms begin to slope up.
Finally Natural Gas is an interesting area we want to watch. We are coming off bearish extremes in sentiment that we haven’t seen since 2002. Meanwhile, the Commercial Hedgers, who we consider to be “the smart money”, has the most net long exposure that we’ve ever seen. These factors accompanied by bullish momentum divergences on multiple timeframes point to a mean reversion here to around $3.40. With prices currently under $2.80, this risk/reward favors the bulls. We’re not in but will be looking for entry points in the coming weeks.
That’s what’s going on in my head.
What are you guys thinking here?
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Tags: $SPY $DJIA $NG_F $UNG $USO $CL_F $ZB_F $TLT $TNX $MOO $MON $MOS $DE $AGU $POT $KOL $UUP $DX_F $6C_F $USDCAD $FXC $XLE $EEM $VNM $FXI $DXJ $EWM $EPHE $EWH $KOL $BTU
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