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.
Before the 62,197 articles and blog posts get written about this market correction, let me throw a few things out there. First of all, it’s nice to see this market pull back a bit. I bet there are a lot of “traders” turning into “investors” and waiting for their crack stocks to come back. If you’re one of those, you deserve to lose money and let this be a lesson. If you had your stop and got out, knowing your risk tolerance ahead of time, good for you. That’s the way it’s done.
With that said, here is the tweet of the day:
Every successful trader I know decides EXACTLY how much they’re willing to lose BEFORE entering a trade. $STUDY
— DarvasTrader.com (@DarvasTrader) June 5, 2013
It’s not about how much money you make. You can’t control how high a stock you just bought can go up, or how low a stock you shorted can go down. There isn’t any amount of home work you can do, or time you can spend starring at the screen that will help a stock do what you want it to do. It’s out of your control. The only thing you can do is limit the amount of risk that you take. That is literally the only power you have. So before we enter any order, we know almost to the penny, how much money is at stake, worst case scenario.
Alright fine, that’s great and everything, but now what? I mentioned on Friday that if 1635 S&P support was taken out, then I would expect some further consolidation, either through price or though time. I still don’t know which one of those two it will be but I am fairly certain it should be a healthy combination of both. So I think directional bets, both bullish and bearish, aren’t (and haven’t been) worth the risk. Whipsaws in both directions are probably the norm for now.
So the majority of our exposure, as it’s been for a few weeks, is in pairs where we have the same amount of money in a long as we do in a short. Not all of these will work, but they will be much less affected by ups and downs in the S&P500 than an outright long or short. We mentioned a few pairs that have been working in a recent blog post. But some have not been. Last Friday, Phil and I discussed a pair that we started putting on where we went long Biotechs and short Staples against it. As well as that looked closing out the week, it smacked us right in the face and we’ve gotten out and moved on. It happens. And it will happen again. But risk tolerance right? See Paragraph 1.
Outside the US, there are a few pairs around the globe that we’ve put on that have been working so far. And they don’t have any significant correlations with S&Ps either. For example, we’ve been long Poland and Italy, while being short France and Switzerland. Out in the pacific, Malaysia is making new highs against Singapore and New Zealand is making new highs against Australia. And there are other crosses out there working that we don’t have on but are watching closely.
Within the US there is plenty happening as well. But obviously I can’t share everything that we’re doing. And the point of this post isn’t to talk up my book. It’s to point out that when markets get discombobulated (yes that’s a technical term) there are plenty of opportunities out there: outperformances and underperformances to take advantage of. So think of this as, not me telling you what we’re doing, but more as a reminder that the US Dollar doesn’t always have to be your denominator. In other words, there is opportunity risk, as well as market risk (especially in this sort environment) by not have another side to a trade
Just my two cents….
You can go carry on with your “market goes up every tuesday” articles or whatever it is you’re reading these days.
I’m going to go mentally prepare for my NBA Finals Game 1 tomorrow….
Tags: $EPOL $EWI $EWQ $EWL $ENZL $EWA $EWM $EWS $XBI $XLP
My buddy Joe Fahmy was nice enough to have me over to his office this evening to chat about the markets. Since we have the technology, we figured we should record it. Here’s how the video came out:
Make sure to follow Joe on Stocktwits & Twitter @jfahmy
Also check it his blog The Next Big Move
Tags: $FEZ $EWG $EWQ $EWD $ILF $EWW $EWZ $EPU $GXG $EPOL $DXJ $EPHE $EWM $EIDO $EEM
There is a lot happening around the world that I think is worth noting this weekend. Some things are good, some bad and some are terrible.
Let’s start with the Good. Obviously price pays, and prices in the USA are still making new highs. The S&P500 closed Friday at yet another 52-week high. The Russell2000, Mid-cap 400 and Dow Jones Transportation average all closed at all-time highs. The Nasdaq100 tried joining the party as $AAPL appears poised to fill that gap helping the $QQQs reach the highest level since October.
Now the bad.
Rotation is terrible. There’s no better way to put it. One of the things that we pride ourselves on is looking at the internals of the market. Who is it that is taking us to these all-time, or 52-week highs? Is it the Financials and Discretionaries leading us? Or is the more defensive areas like Consumer Staples and Utilities that tend to outperform in corrections?
Well, our sector rotation model that takes all this stuff into account turned red earlier this week for the first time since October. It doesn’t always nail the top to the day, but it usually gets the area right. Moreover, Bloomberg’s Relative Rotation Graph shows clearly that the leaders are Staples and Utilities. Unfortunately for market bulls, it appears as though Financials and Discretionaries, which have been weakening for a few weeks, have a date with the lagging quadrant. (click chart to embiggen)
And very quickly, let me touch on the Ugly.
I think the ugly has to be what we’re seeing out of Europe. Right from the start of the week, these countries’ averages got smacked in the face. Italy, Spain, Poland….all of our favorite spaces the last few months – crushed. Greece tried bucking the trend, but seems extremely vulnerable up here. We’ll get confirmation this week, but Greece looks like it has False Breakout and Bearish Divergence written all over it. Europe as a group got creamed as well, if you look at the Euro Stoxx 50. Trendlines being broken and divergences showing up are not a healthy combination.
The way I look at it, assets in bull markets don’t get crushed that quickly. Some down 5-6% overnight near fresh highs. Definitely not on my list of bull market characteristics.
Here is Europe flirting with that trendline from the summer lows with bearish divergences in momentum that are screaming at us to get the hell out of the way:
So the stock market bulls to me, still have a fighting chance. This correction in the US could be through time, and not necessarily through price like Europe. Remember markets can correct in a number of ways. And prices in the US are still at new highs. But I think it’s worth pointing to the internals and intermarket relationships that help supplement what we’re seeing out of US prices. When you combine that with the unusually bullish sentiment readings that we’re seeing around The Street, there are some red flags that I personally can’t ignore.
Let’s see what this week shall bring. I’m sure if prices correct, the headlines will find some sort of excuse that has nothing to do with what is mentioned here, but we’ll know the truth. Also, as my friend Alex Tarhini @tarhinitrade put it, the same top callers this whole way up will be the same ones picking a bottom during the correction, and the cycle will just keep repeating itself….
Tags: $EWP $EWI $FEZ $EPOL $QQQ $IWM $MDY $SPY $XLU $XLP $XLF $XLY