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…]
One of the more valuable tools that we have as market participants is Relative Strength. Where are the weaker areas of the market and where are the stronger ones? This concept can be seen among individual US Sectors. For example Financials have been laggards while Healthcare has been a leader. You can take that one step further and look at the relative strength out of Wells Fargo, while Citigroup has been one of the worst names in the Financial sector. But as you guys know, I like to take my analysis globally and look for relative strength among different types of countries and regions. India this March really stood out when compared to the other BRIC nations (see here). While Russia, Brazil and China were breaking to new lows, India was breaking out to new highs. I simply can’t call it a coincidence that India then rallied 35% from March while the others continued to struggle.
Today we’re taking a closer look at Europe. Members of Eagle Bay Solutions receive a much more detailed report of Europe every week that also includes the rest of the countries around the world on multiple timeframes with additional momentum analysis and price projections. I wanted to share with you guys just a few simple charts from Europe comparing some of the laggards to these two leaders: Belgium and Switzerland. What stands out to me is where these two countries are relative to their 200-week moving averages. From a structural perspective, all of the European nations tested or briefly broke this particular long-term smoothing mechanism. These are all 6 year charts. Notice the differences:
Here is the Euro Stoxx 50 $FEZ representing Europe as a group breaking the 200-week moving average:
Going through each of the individual country ETFs in Europe, these two in particular really stand out. It could be nothing. Or we can look back 6 months from now and say, “oh wow that was the tell”. I guess we’ll see. But either way, I think this is a good exercise regardless of the asset class or group of stocks or ETFs that we’re analyzing. I think there’s something here. Maybe they hold up better if stocks continue to struggle as they have been throughout 2014. Maybe on the next rally these are the outperformers. Maybe there are some good pair trades where these two can be the numerators while the laggards are on the short side of the pair. Execution-wise, it really just depends on your goals, time horizon and risk tolerance. But once that is defined, I think this can be a good starting point.
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Tags: $EWI $EWP $EWG $EWK $FEZ $EWL $EWD
As you guys know I am constantly reviewing the price action from stock markets all over the Globe. To me, the S&P500 is just one index in one country on this giant planet that we call earth. I get the fact that the rest of the world looks at the United States as a leader and other stock markets tend to follow along in terms what happens in the Dow Jones Industrial Average and S&P500. But for the purposes of managing money, it’s just one asset of an infinite amount of liquid assets around the globe.
Looking at all of the global averages, I can’t think of one that is not in a downtrend vs the S&P500. Today I wanted to share two charts that I think are good examples of why America is the best in the business.
The first one is Emerging Markets as a group compared with the S&P500. The pair trade, if you will, would be long of SPY and short EEM. The iShares Emerging Markets ETF includes China, South Korea, Taiwan, Brazil, South Africa, India, Russia, Mexico and others. Look how nice this giant bottoming pattern has been over the past 8 years. Also notice the breakout above former resistance to start 2014 and now a successful retest:
The next chart compares the S&P500 with Europe. In this case, this pair is long SPY and short FEZ. The Euro Stoxx 50 ETF includes France, Germany, Spain, Italy, Netherlands, Belgium and Finland. Look at this consolidation over the last couple of years well-defined by these two converging trendlines. These symmetrical triangle sort of formations tend to resolve themselves in the direction of the underlying trend. And in this case that is precisely what has occurred. We are currently hitting fresh highs and it appears very clearly to me that the path of least resistance is higher:
These charts tell me that the United States of America is the best place in the world. Execution-wise, I continue to be a ‘buy the weakness’ guy for these pairs. Risk management-wise any failures where these ratios return back below broken resistance, and a more neutral stance would be appropriate. But from where we stand today, the US rules the world and should continue to head higher on a relative basis.
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Tags: $FEZ $EWG $EWP $EWI $EWN $SPY $EEM $EWZ $EWT $FXI $RSX $EPI $PIN $EEM
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
I mean, we’re just trying to have a nice little bull market over here in the U.S., minding our own business, and they gotta go underperform and diverge to ruin all the fun. Seriously though, what’s Europe’s problem?
OK just kidding. But not really.
I think I’ve been pretty vocal over the last month or so about the underperformance in Europe. I’m not going to link to posts or tweets or anything, you can go back and find them if you want. That’s not the point of this. Today I want to pull up a very simple chart of the Euro Stoxx 50 Fund to look at, not only how broken it has become, but also how vulnerable its condition was coming into this weekend.
Here is a daily bar chart of “The FEZ” as we like to call it at our shop. I remember the original breakdown like it was yesterday. It was February 4th and I had just woken up in a New Orleans hotel room after a memorable night at the Super Dome. I was extra dehydrated that morning (can’t imagine why). And European averages were getting destroyed. Germany was down 3.6%, France down 4%, Spain down 5.3%, Italy down 5.8%, the entire Euro Stoxx 50 down 4.5%. The list goes on and on. And I said to myself, “this is not bull market behavior”. And it certainly wasn’t. Healthy stocks and assets don’t get smacked in the face like that overnight (yes this all happened overnight). And by the way, Emerging markets were getting smoked that day also, but that’s another discussion for another day. Let’s stick with Europe for now:
You can see that there was an island reversal of sorts created on that Monday morning breakdown after the Super Bowl. Along with that came a bearish divergence in the Relative Strength Index. As prices made fresh highs into that “island”, if you will, momentum was already rolling over. This is shown clearly in the chart above. Go run through a some of the individual countries and you’ll find similar looking charts.
Then a few weeks ago we had that Monday Italian Election fiasco. That day, confirmed a hard breakdown below the uptrend line from last summer’s lows. Again, stocks and assets in bull markets don’t behave like that. They just don’t get crushed in one day the way these have. Italy down 10% in 6 hours? You don’t need to be a technician to know that isn’t bull market behavior.
Now since then, US Markets have continued to rally into historic territory. Investors waving their hands in the air like they just don’t care. And maybe they still don’t. We’ll see. But European markets are vulnerable. They’ve rallied back up towards that broken uptrend line and retested it this past week.
Even the Euro itself peaked on that Super Bowl weekend. Look at $EURUSD Daily bars. You think it’s a coincidence that the currency topped out at the same time that their equities did?
Europe is vulnerable. Not really an opinion, but more of a fact I think. So will the US continue to shrug it off? We haven’t seen the two of them disconnect for this long since 2009. This is a chart comparing the peaks in Europe with those of the US. Typically, Europe tops out first, and then the US gets the memo and rolls over. Well, we’re going on 6 weeks now without the US joining the correction. Will this continue? Or will the US play catch-up?
European stocks better start rallying very soon for none of this to matter technically. And by soon, I mean like right now.
You see what I did there? Didn’t have to mention Cyprus in the entire post.
Tags: $SPY $FEZ $EWP $EWI $EWG $EWQ $EURUSD $FXE
After a decade of underperformance, I guess we shouldn’t be surprised that European stocks keep struggling when compared to the United States. But I think it is worth noting that even after the monster rally in Europe during the second half of last year, the downtrend relative to the US got going again to start 2013.
With counties like Italy down over 7% year-to-date, Spain flat, Greece down, and the “quality” of Germany and France up barely 1% for the year, it’s no wonder the group is underperforming. Below is a chart of the European Top 100 Stocks vs the S&P500. The decade plus long secular downtrend in this pair seems to be continuing into the new year:
I can’t help but notice how even in the midst of all of that strength in the second half of last year, the relative strength index (RSI) never reached overbought conditions. This is more evidence that the downtrend in European stocks relative to the United States is still intact.
It looks to me like fresh lows are in store here and rallies need to be faded. The weakness in stocks is definitely coming out of Europe.
Tags: $EWG $EWQ $EWI $EWP $GREK $FEZ $SPX
It looks to me like the US Stock market is finally joining this Bearish Divergence party that we’ve seen throughout Europe this year. I think this is a development that is definitely worth paying attention to. You see, when prices in a given asset class make new highs, we also want to see momentum putting in higher highs. When momentum diverges, it’s a heads up that something isn’t right. Think about it, when you throw a tennis ball up in the air, momentum in the speed of the ball is going to slow before it eventually hits its peak and reverses right? Same thing in markets.
In our case, we use the Relative Strength Index (RSI) as our momentum indicator of choice. We saw this oscillator diverge out in Europe throughout January, and we’re currently watching the consequences. The EuroStoxx50 is down over 8% for February. Italy is down over 13% from its January highs, Spain is off more than 10%, and even the “quality”, Germany and France, came off 6% and 7% respectively. All of these following bearish divergences between price and momentum.
Now we’re seeing this develop in the US. Take a look at RSI this week make a much lower high as prices started the week off with fresh highs before rolling over. The divergence is clear and is a major warning sign for us.
We’re also seeing this development in a few of the other averages. Here are the Midcaps and Transports as two more quick examples:
I think it’s important to point out that this is happening. Last summer we saw the complete opposite occurring. Prices in S&Ps were making new lows into early June while RSI was putting in a higher low. While everyone was worried about Europe splitting up and the S&P500 breaking below the 200 day moving average, momentum was telling us that things were much better than the headlines would represent. In fact, Oil and Precious Metals were putting in Bullish Divergences as well. So I think it’s only fair that we mention the bearish side of it now.
Tags: $MDY $DJT $IYT $SPY $SPX $FEZ $EWG $EWI $EWQ $EWP
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