Today JC discussed our March playbook for Members and outlined some areas we'd be looking for a bounce with well-defined risk and others that we want to be completely avoiding.
I wanted to share a few breadth measures to provide context around the recent decline and see if they offer any clues around what's next.
We had mostly "do nothing" responses again this week but buyers or potential buyers came in close second, many of which said they were waiting for confirmation of the momentum divergence and failed breakdown before taking action.
We only had a few sellers, which is interesting because that's the camp we'd fall into as long as prices remain below support.
One of the main reasons for our bearish bias towards this chart is the fact that it's been in a long-term downtrend and consolidations tend to resolve themselves in the direction of the underlying trend.
In last week's Chart of the Week, we wrote about our bullish outlook on Gold and followed it up with a deep dive on the entire Precious Metals space, which included a number of trade ideas to express our thesis. This week, we have a table that helps provide a different perspective on its recent price action but arrives at the same bullish conclusion.
The shiny metal has gotten a lot of attention lately as it currently sits around its highest level in seven years.
After about a 9% surge off of this month's lows, we'd expect prices to consolidate in the near-term. But after that, we're betting on new all-time highs for Gold in the coming quarters as long as prices are above last year's highs near 1,560. Here's how we see it.
We've been very clear about how we wanted to avoid owning stocks this month. Fortunately, bonds have been the beneficiaries of the relentless selling in these stocks. Nothing has changed for the positive. But it's actually some former leaders completely falling apart that now has my attention.
Remember when Industrials broke out to new all-time highs? We said that as long as that was the case, how bad could things be? Well, Industrials are no longer above those former highs and actually just broke down to new 10-year relative lows. This is behavior consistent with an environment where we want to be selling stocks, not buying them:
Larry McDonald is the guy I turn to when I want to talk about the Bond Market. He always has something insightful about what's happening that I'm probably not seeing. We've become friends over the years but I originally got to know who Larry was by reading his book, Colossal Failure of Common Sense. This is a book about the collapse of Lehman Brothers being told by a bond trader inside the firm. I encourage you to pick it up and give it a read. It will give you good insight as to what exactly was taking place at the time. In this podcast Larry tells us a good story about the day his team had the most profitable day in the history of the bond desk at Lehman and Dick Fuld didn't even bother to come down and say hi.
For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!
We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.
You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?
The risks associated with owning stocks are currently elevated.
There are a lot of things I can say, levels I can point out, possible outcomes I can walk you through, all those things. But the one common denominator between all of those is that the risk in owning stocks is currently higher than it normally is.
This is an important time to remember your original investment objectives, time horizon and risk parameters. Before buying a stock, or entering any investment for that matter, these 3 questions need to be answered. I can't answer them for you. But what I can do is show you what we're seeing from an intermediate-term horizon.
Our goals here are to make money this quarter. We care about the coming weeks and months. It doesn't matter to us what the market does next year, and it doesn't matter what it does today. Weeks and Months. That's our focus.
Some of you are in the BUY THE DIP camp and champing at the bit to make a heroically timed buy here. Others are in the APOCALYPSE camp and are eager to "short-the-world!"
We've made it clear over the last few weeks that we don't want to be long stocks given current conditions and think there's downside risk from a short-term perspective, despite the structural picture remaining largely unscathed.
Given last week's slight downside follow-through in US Stocks, I wanted to share two breadth charts from our Market Internals Chartbook that summarizes current conditions well.
With over 5,000 ETFs trading globally, there have never been more vehicles out there for a market participant to choose from, each with their own spin on a traditional asset.
Today I want to take a look at two WisdomTree ETFs that put what's becoming an ever-more popular spin on the vanilla Emerging Market and China indexes out there.
Although I'll briefly discuss the goal/methodology of these vehicles, our primary goal is to look at them from a Technician's perspective. What does this ETF's construction mean for the underlying holdings and exposure it's providing, and more importantly, its effect on price action?
We had a lot of "do nothing" responses this week, many of which were caveated with the fact that the structural trend is lower, thus anticipating an eventual breakdown but waiting for more data to come in to confirm it first.
We also had a number of responses with conviction to buy the test of support and plenty of others who wanted to sell into it or "look to get short." The majority took a neutral approach, preferring to see how prices react at this key level of interest before choosing a directional bias.
I think that is the most prudent thing to do in this situation as well, so with that as our backdrop let’s take a look at this week’s chart.
We've been fading gold since September for a variety of reasons, but primarily due to the overwhelming amount of selling being done by Commercial Hedgers.
While many of those conditions still exist our risk management for this thesis has always been Gold closing above 1,600.
This week we're getting that, so let's take a look at what's next and how we're taking advantage of it.
