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-Third Of the Year Is Over. Now What?
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
FOMC Day: Monday Morning Quarterback
I wanted to take a few minutes to talk about my day. I think it’s important to look back and reflect on your decision making, whether it was right or wrong. This post is both for me (to look back on in the future) as well as for you (the best way to learn is from other people’s mistakes right?). I’m not a day-trader but with this much volatility, there are some things we can do intraday on a day like this.
Let’s begin with how I started my Wednesday. I came in heavy short Vietnam after it rallied back last week to retest broken support. This one seemed like a no-brainer to me. With all that former support just above 18 broken that badly, the first retest has to be met with sellers right? And it was. We nailed. Now, did I cover all my shorts at the lows? Of course not. But I did get half off down in the 17.60s-70s.
I also shorted the heck out of the russell2000 this morning after the new all-time high that it put in at the open couldn’t hold for more than a couple of minutes. Talk about sick risk/rewards. I nailed that one. Pre-fomc decision, your boy was looking nice on that short. But I didn’t cover a single share and got stopped out when it took out those highs. Lesson learned. Don’t be greedy.
I came in Long US Treasuries via $TLT Calls. After the morning dip started to reverse higher, I doubled the position. This time I was smart, I took off my add before the rate decision. But I guess I wasn’t that smart, because they ripped a lot higher later in the afternoon. Man this market is humbling…
As far as that Vietnam short position? The half piece I had left ripped in my face after 2 o’clock. But did anything change? No, we’re right back to where we shorted it originally. So put back the other half position that we covered earlier…..
Now it’s 3 o’clock or so. Everything is hitting new all-time highs: S&Ps, Dow Industrials, Trannies, the Dow Theorists are going buck wild….but look who’s not making new highs. Look who isn’t even close to all-time highs. Look who has been quietly underperforming for months: regional banks $KRE – okay, S&Ps are approaching R3 and regionals are not making new highs – let’s short the heck out of them.
Oh wow, S&Ps are still rocking, and Regionals are rolling over – let’s short more….
Nice, treasuries are flying. As we approach the 50 day moving average in $TLT – we’ll take the rest off. Flat the bond position…
But now regional banks are red. And no one seems to care. I like that. Do we cover? How much do we hold on to? It’s the first sector that’s red since 2 o’clock. We’re short the hell out of them. Do we be disciplined? Or do we push the envelope? They went right through VWAP like a knife through warm butter. The market is speaking – let’s stick with the moster position. S&Ps are rolling over back below R3 and regionals are now down 0.40% and it’s only 3:30.
Ok now we’re back down to the lunch lows in $KRE – let’s not be greedy and take 1/3 off. Fine, pull the trigger. Covered at 36 – nice trade J – 2/3 short position left.
Ok so now there’s about 25 minutes left in a very volatile day. I’m having a nice one P&L wise (thanks to bonds and the regional bank short). I have 2 positions left – VNM and KRE: both shorts. P&Ls are approaching intraday highs from earlier today (you know, the ones I gave up for not covering enough….)
Regional banks still look like crap – now they’re down 0.75% and at the lows of the day – all while S&Ps are just ticks from all-time highs. Stick with it J.
It’s 3:40, S&Ps are bouncing to retest R3 and regionals got no bounce – making new lows for the day. Stick with the short J.
We’re approaching the 20 day moving average, which is also the 5 day. Let’s cover another 1/3 here in $KRE. P&Ls are at highs of the day, let’s not be greedy – we nailed this trade. Okay, put in a limit order a few pennies above those moving averages – $KRE now down almost 1% for the day and 2% from the highs. I hope we get filled. Someone once told me that limit orders limit profits…..
It’s 3:45 – vietnam chilling near the highs of the day. not good. Treasuries rolling over. Nice! Good sale.
Meanwhile $HLF the one I sold all of yesterday and have no position in is chilling at $73.00 – right at last year’s all-time highs. Nothing to do there yet. Man I love this one…
10 minutes left until the market closes. My 10-minute chart in $KRE still hasn’t put in a green candle since we shorted it just before 3 o’clock. Still haven’t gotten filled on my short cover. Damn! Vietnam making new highs. Damn! Emerging markets also at highs – not a coincidence. Damn!
Okay market is closing, I’m not getting filled on that limit order in regionals, let’s just take it here and leave the other 1/3 position into tomorrow. Vietnam looks great, way too much strength to be short this much, let’s cover what we added back on and leave half on against former support and the 50 day moving average.
Should we get back in the bond trade? Nah, let it chill out a bit and we’ll worry about it later in the week.
Anything else? Pissed I missed that emerging markets trade. Oh well….
P&Ls near the highs of the day, but man we could have done so much better….
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What could have I done differently? –> Covered half the Russell2000 short, or even all of it before the fed meeting. We were up so nice going into it. Why take it through an announcement that we have no control over. My bad.
What did we do well that we could potentially do again in the future? –> Shorting the underperformer right at the highs. Great risk/reward, failed at the 50 day, first one to turn red. We crushed it. Job well done.
So how else did we screw up? –> Re-shorted Vietnam a bit too early. Just like we shorted the weakness in banks, we should have taken the strength in emerging markets and Asia pacific a bit more seriously. It was starring at us right in the face.
And that was my day….how was yours?
Check out my Stocktwits Steam to see most of this stuff tweeted out live.
Tags: $VNM $KRE $TLT $ZB_F $SPY $ES_F
Weekend Market Video With Phil & JC
We had a lot to cover this week. And although this may be a boring few days coming up, there are some interesting setups that could start to get going. First of all, everyone hates bonds so I think that’s something to pay attention to. But we also discussed Herbalife, Vietnam, S&Ps and the importance of keeping an open mind as a market participant.
Enjoy:
Tags: $SPY $DJIA $DIA $SPX $HLF $VNM $TLT $ZB_F $TNX
Short Ho Chi Minh
Vietnam has now officially lost all of its year-to-date gains. The Market Vectors Vietnam ETF was up a quick 30% to start 2013. And since then, it has slowly been giving it all away. Yesterday, the ETF closed at new lows for the year and took out all of the previous support.
Today’s chart shows the daily bars for $VNM –
I think the support levels here are pretty clear. The July lows were right around 18.10, but the 18 and change level was successfully tested 4 times, before ultimately breaking down this week. I think that as long as prices remain below those levels, Vietnam should stay under pressure.
Volume expanded on the recent break, helping to add fuel to the fire. And when it comes to momentum, as you can see in the chart above, there is still plenty of downside left before reaching any extreme oversold readings. The fact that RSI has failed for several months to stay above 50 is another negative for this security.
With a lot of the Asia Pacific stocks taking a beating lately, I wouldn’t be surprised if this was the next one to get hit hard. Keep an eye on this Ho Chi Minh Stock Index…
Tags: $VNM
Vietnam Underperformance Continues
This has been one of my favorite trends over the past month: Long US / Short Ho Chi Minh. I’m not really sure what’s going on over there, but they’ve been a serial underperformer for months. And sure, there have been plenty of those underperforming nations so far in 2013, most of them actually. But the chart of the SPDR Dow Jones Industrial Average vs the Market Vectors Vietnam has just been clean. I love that. Edwards and Magee back in the 1950s would have definitely been proud of this one.
Here is $DIA vs $VNM coming out of that triangle-looking consolidation pattern:
As you can see, this monster rally got going after a bullish divergence was put in earlier this year. Fresh lows were made in the pair coming into February while momentum was already turning higher. Looking at each of them individually, it’s easy to see why.
The measured move on something like this is about a buck and a quarter, which is the original move that took it up into the consolidation. Take that and add it to the breakout this week, and you have a pretty aggressive price target up near 8.40
Like I said, the individual setups looks nice, but the pair is what gets me. We obviously want to see this week’s breakout hold for us to continue to like it, but the trend here is higher which puts odds in our favor.
We first mentioned this a few weeks ago in an end of Q1 video that Phil and I did together, check it out.
Tags: $DIA $VNM $DJIA