Friday, March 28, 2014

Will The Real US Dollar Please....

One could argue that the DXY Index is perhaps the most common representation of the US Dollar (USD). However it's not the only representation, and depending on which one is chosen can often dramatically alter one's view of the USD.

The DXY measures the performance of the USD versus a basket of six foreign currencies, deriving a geometric mean based on preset weights. Currently the currency with the largest weight (by far) in DXY is the Euro at a whopping 57.6% weight. The currency with the next largest weight is the Yen at a much more meager 13.6% figure.

An alternative measure for the USD is the Fed Reserve's trade-weighted representation (USTWBROA on Bloomberg). It offers a depiction of the USD that takes into account a much broader basket of currencies, currently comprised of 20+ regions and/or countries. And the weights are flatter with the largest weight, China's Yuan, set at 20.8% and the next largest weight, the Euro, at 16.2%.

Over time the DXY and USTWBROA have tracked fairly closely, but as shown below, that's not been the case since the latter half of last year.

Source: Bloomberg

Whereas the DXY broke down through a rising trend in the 3Q of 2013, the USTWBROA has maintained its steady ascent within the rising trend. Obviously the strength of the Euro and the variance in composition and weights of the two USD representations have much to do with this fairly recent disconnect. But depending on which measure one chooses to portray the USD, quite a different view can emerge. In the chart above, the DXY appears bearish and yet the USTWBROA appears quite the opposite. Food for thought.

Tuesday, March 11, 2014

Market Outlook and Materials vs. Consumer Cyclicals

First, apologies for the recent lack of blog posts, but I've explained in the past my current situation (ongoing job search due to my employer shutting down). With regards to the market, frankly I haven't had much to say since my posting on February 11th. On February 3rd, when the S&P 500 was around 1780, I wrote that I wanted to see at least two things occur to confirm a bottom, 1) the S&P 500 put together three consecutive up days off this low or one significant up day with a bar/candle range spanning 15-20+ points, and 2) the MACD to trigger a buy signal, i.e. for a bullish crossover to occur in the 12- and 26-day EMAs, also shown with a positive histogram. Both of these conditions were achieved on February 11th, see chart below (orange line).

Since February 11, the S&P 500 has risen 4.3% and is fast approaching the upper-bounds of an ascending channel (red lines). Longer-term the market remains in a solid uptrend, however several oscillators currently reside in overbought territory and I would expect this rally to slow down, consolidate sideways or even pullback from these levels.

The weekly S&P 500 chart below also suggests an interim peak may be at hand:

Despite the fact the S&P 500 is up YTD, attaining a new all-time high, note that the weekly MACD has yet to confirm this rise in the Index, instead remaining in a downtrend and establishing a bearish divergence. As shown in the chart above, a few negative divergences have developed over the last few years and all eventually resulted in a market pullback or correction, some more severe than others. 

One of the more interesting developments YTD is the erosion in relative performance of consumer cyclical stocks (I wrote about on January 21 and February 14) and the resurgence in what has been a longtime laggard, the materials sector.

The weekly chart above plots the relative performance of the XLB vs. XLY (or Materials SPDR vs. Consumer Discretionary SPDR). In late December, the XLB:XLY relative price successfully broke through a two year declining trend line and XLB's outperformance over XLY has continued into 2014. 

Will this trend continue? A significant factor will be the strength of the US dollar.

The weekly chart above shows the relative performance of the XLB vs. S&P 500 (lower inset) and the US dollar (USD, upper inset). It's fairly plain to see an inverse relationship exists as the relative return of material stocks tends to fare better when the USD is weak and declining. 

Regular readers know that I turned bearish on the USD last October and I have yet to see a compelling reason that warrants changing that stance. The US dollar is down since early October and the weekly chart above shows the USD has been carving out a descending triangle formation of sorts since the 2Q of last year. If the USD breaks to 79 or worse, it would signify a clear breach of support as indicated by the gradually ascending trend line. I would also point out the developing two-year bearish divergence between this modestly rising trend line (higher lows) and the downward trending MACD indicator, which also resides below zero. Finally, the Death Cross condition remains in place for the USD, i.e. the 50-day MA is below the 200-day MA.

(Source for all charts:

Wednesday, February 19, 2014

Emerging Markets Remain Relatively Submerged

Emerging markets as a whole just can't seem to get out of their own way. The MSCI Emerging Markets ETF (EEM) is down 6% YTD and has been underperforming the S&P 500 for years. What is the current outlook?

Ultimately I believe a view on emerging markets in isolation is not enough and instead should be framed emerging versus developed, or as more of an asset allocation decision. Should I be repositioning more funds out of developed (S&P 500) and into emerging markets (EEM), or vice versa?

I have found that over time the relative return of industrial metals versus a commodity index (CRB) does a very good job at leading the relative performance of the EEM vs. the S&P 500. The relationship makes sense since emerging markets tend to have a high sensitivity to global economic activity, and industrial metals tend to have a higher sensitivity to global economic activity than most other commodities.


The weekly chart above shows five signals (2 buys, 3 sells) since 1999, triggered by trend line breaks in the industrial metals vs. CRB relative return (lower inset). 

Note that a relative-return buy signal for EEM has yet to be triggered. Therefore, based on this one indicator, better to remain overweighted in developed (S&P 500) and underweighted in emerging.

Friday, February 14, 2014

Consumer Discretionary: Pain Has Been Wealth-Indifferent

A few weeks ago I asked the question, "Is the amazing run for consumer discretionary stocks coming to an end?" Based on the hourly chart below, the jury is still out on that question.

The XLY continued to decline into earlier this month, underperforming the S&P 500 as shown in the upper inset. Since February 3rd, the XLY has bottomed and risen by about 6%, however note the relative performance. Initially the ETF outperformed sharply when rallying off the low, and yet since last Thursday the relative return of the XLY has reversed course and trended downward. This trend is in stark contrast to the ascending absolute price trend, resulting in a bearish divergence. 

I would also point out that with many consumer discretionary/cyclical stocks, the relative pain suffered YTD has been income or wealth-indifferent. As shown below, several higher-end, luxury names have taken it on the chin just as badly as companies associated with middle- to lower-income consumers.

High-end, luxury stocks vs. S&P 500

Middle- to lower-income stocks vs. S&P 500

Wednesday, February 12, 2014

The January Barometer, Another Take

I know it's a bit past-due, but I wanted to offer another take on the so-called January Barometer ("as goes January, so goes the year"). Others have already weighed in on this subject, quite skeptically overall, and yet I'm not so sure that this skepticism is warranted.

From data in The Stock Trader's Almanac, I put together the following:

Since 1950, there have been 40 occasions when the S&P 500 has been up in January and 24 times when the S&P 500 has finished down in January. For the 40 years when January has been up, the S&P 500 finished the year higher 36 times and was down for the year in just three occasions (with one year finishing near exactly flat, excluded). For the 24 years when January has been down, the S&P 500 has finished those years higher in just 11 occasions, with 13 of the 24 years resulting in down years. The key column above is on the far right, "% UP," listing the percentage of up years. Overall, for the entire 1950-2013 period, the S&P 500 has been up in 47 years and down in 16 (again, excluding the one flat year) for a 73% up percentage. Compare this 73% base line figure to 90% up years for the S&P 500 when January has been up and just 46% up years for the S&P 500 when January has been down. Interesting.

The following is from Ned Davis Research:

In the period 1928-2012, there have been 54 up Januarys and 33 down. What has happened after these Januarys, for February-December, thus excluding any effect January may be having on results for the entire year? For up Januarys, the ensuing February-December period has returned 8.3% on average or a median return of 10.9% for a 78% up hit rate. Whereas for down Januarys, the February-December period returned just 2.8% on average and an anemic 2.3% median return for a 58% up hit rate or percentage.

Based on the data above, I wouldn't be so quick to dismiss the January Barometer. It appears there might be something to it.

Tuesday, February 11, 2014

Encouraging Signs

With regards to a market bottom, last Monday I wrote that for starters I'd like to see 1) the S&P 500 put together three consecutive up days off this low or one significant up day with a bar/candle range spanning 15-20+ points, and 2) the MACD to trigger a buy signal, i.e. for a bullish crossover to occur in the 12- and 26-day EMAs, also shown with a positive histogram. As of today, it appears both of these conditions have been met.


The S&P 500 chart above shows three consecutive up days (including two fairly wide bars) and the MACD histogram turning positive. Granted, I would prefer to see a more meaningful buy signal from the MACD, but it's moving in the right direction. It's also encouraging to see the RSI (upper inset) get back above 50.

The NYSE High-Low Index is rising off an oversold level:

Typically when this index first rises from such a low level, it suggests a bottom is near. However, given the compressed severity of this recent correction, it wouldn't be unusual for the market to pullback on the heels of this recovery rally. As further confirmation that a credible low has been established, look for the MACD of the NYSE High-Low Index to trigger a buy signal (positive histogram) -- which has yet to happen.

Monday, February 3, 2014

We're Still Not There Yet

Last Tuesday, I asked "are we there yet?" with regards to a market bottom. My answer then was no, not yet, and it remains my answer. 

What will it take to change my view? For starters, I want to see two things happen.

First, I'd like to see the S&P 500 put together three consecutive up days off this low or one significant up day with a bar/candle range spanning 15-20+ points. Obviously both conditions occurring would be even better. The orange boxes in the daily chart above identify past instances when either of the two conditions have occurred. With the market able to string together at least three straight days of gains and/or experience a big positive spike for the day, it goes a long way towards indicating that sentiment is shifting from fear and caution to more assured, risk-seeking behavior by investors. And as shown in the chart above, we're not there yet. That said it's encouraging to see the S&P 500 holding above the 100-day moving average (red line), which has served as sturdy support in the recent past.

The second thing I'd like to see occur is for the MACD to trigger a buy signal, i.e. for a bullish crossover to occur in the 12- and 26-day EMAs, also shown with a positive histogram. I always prefer to see a meaningful signal with the histogram getting beyond just barely turning positive, but again as shown in the chart above, such a bullish signal is quite a ways off from happening anytime soon.

Having commented on the near-term outlook for the market, I thought it would be appropriate to briefly review a much longer-term perspective.

The monthly chart above displays the S&P 500 going back to 1997. In short, the longer-term backdrop for the market remains solidly bullish. I would become very concerned about a secular decline if 1) the 6-month moving average (blue line) were to cross down through the 12-month moving average (red line), 2) the stochastic were to breach 50 to the downside (note blue boxes), and 3) the rate of unemployment (orange line) were to begin to trend higher (see previous blog post). All three of these conditions occurred in late 2000 and in late 2007 or at the start of 2008. None of the three conditions are in place currently. The 6-month MA remains 75 points above the 12-month MA, the stochastic is extended at 95 (!) and the unemployment rate continues to trend down at 6.7%.

Of course, these conditions could change in the near future, and understand that I track (much) more than three indicators or conditions. But the larger point remains: it would take months for these conditions to change and until that occurs, the long-term market outlook continues to look bullish.