I just finished my Commodities and Currencies review for the week and wanted to share some of my notes. Here you go: [Read more…]
In this week’s members-only letter we discuss the following topics:
- Why Has Latin America Been the Best Place To Invest?
- What Will Further U.S. Dollar Weakness Do To Stocks?
- With Interest Rates Bouncing, What Do We Do With Bonds?
- The Consumer Staples Trade and Coca-Cola
- Gold Miners and Other Metals
- Will Developed Markets Catch Up With Emerging Market Stocks?
- U.S. Small & Micro-Caps vs U.S. Large-caps
- What Does This Strength In Transports Mean?
Canadian Dollars have been one of my favorite shorts around the world for a long long time. We are talking about one of the most beautiful bases I’ve ever seen in my career. The old sayings are, “The bigger the base, the higher in space” and, “The bigger the top, the bigger the drop”. I learned these from technical legend Louise Yamada who told me she picked these up from Alan Shaw, retired technician and legend in his own right. In the case of Canadian Dollars, the big top took place between 2009-2013, while the huge base could be seen in USD/CAD but both had the same implications (see base here). All targets have been achieved and now I believe it’s time for a change in direction.
First of all, let’s take a look at USD/CAD from the long-term to get structural perspective. This one is very clear: we’ve run right into the 61.8% Fibonacci retracement of the entire 2002-2007 decline. We kissed this level over the past week and it can be seen in this monthly bar chart:
Here is the weekly timeframe showing prices slightly exceeding the 2008-2009 highs in order to achieve this Fibonacci retracement target seen in the chart above. This one has “Failed Breakout” written all over it and we’re seeing confirmation of this with momentum putting in a bearish divergence at these recent highs. This could get ugly quickly and a break back below those 2008-2009 highs would be the catalyst to really get this going to the downside:
Finally, here is a short-term daily chart showing prices recently hitting that key 61.8% Fibonacci retracement of the 2002-2007 decline (red dashed line). This level also coincides with the 161.8% Fibonacci extension of the most recent correction which took place this Spring. Long-time readers know that it’s when these Fibonacci levels cluster together like this that I really start to pay attention. Momentum is also putting in bearish momentum divergences all year putting in lower highs with each new high in price:
I’m a weight-of-the-evidence guy. To me, the bearish implications here for USD/CAD (bullish for Canadian Dollar Futures) are very skewed in one direction. Price-wise this is a buy 100 times out of 100. The Commercial Hedgers, who we consider the smart money, are pretty much as long as they’ve ever been. Sentiment-wise, our data suggests that Canadian Dollars today are more hated then they have ever been (our data goes back 25 years). What more can you ask for?
Risk management-wise, which is the most important thing, I think the market has made it very clear for us. We only want to be long Canadian Dollars if we are above this week’s lows. That’s it. Below that and there is nothing to talk about. In the case of shorting USD/CAD, we only want to be short below this week’s highs. It’s that simple. Target-wise, sentiment unwinds like this can be very powerful and can take a long time to complete. I would be very patient here taking profits as I think this one has a long way to go.
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Tags: $USDCAD $6C_F $DX_F $UUP $FXC
Wednesday morning I was down at the Nasdaq chatting with Frances Horodelski from Business News Network. The mean reversion trade in Energy worked out nicely since last time I was on BNN in March. But at this point I think the easy money has been made there and money appears to be rotating into the Agribusiness sector. We discuss how to take advantage of this as well as the US Stock Market as a group and the weakening US Dollar.
Here is the full interview:
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Tags: $SPY $MOO $TSN $AGU $6C_F $USDCAD $UUP $DX_F $XLK $XLP
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