Friday, March 29, 2013

Natgas: Little Evidence of Excess Supply from Fracking

I’ve been bullish on natural gas since last July and natgas is up 29% since then (vs. -1% for the CCI index). The chart still looks very bullish:


The price recently surged to $4, successfully breaking through the neckline of a fairly massive bullish inverse head-and-shoulders pattern. All good.

Question: if fracking is allowing for an unprecedented boom in natural gas supply, then why does the chart appear so bullish? Despite the flood of supply, is it saying demand for natural gas is outstripping supply? Or is it saying supply has been overstated?

Thursday, March 28, 2013

Is A Market Top Close At Hand?

I have been bullish on the market (since last September), however recent action is making me nervous.

Given the extreme momentum thrust in the YTD rally, I have felt any possibility of a market top would be longer-forming and protracted, again because the built-up prior momentum would have carry-through, enabling any dips to recover fairly quickly. However, note the chart below:


It’s an hourly chart of the S&P 500. Over the last ten trading days, the index has been unable to break through the all-time high level of 1565, getting to or near 1564 a few times only to abruptly retreat. Note also that during these ten days, the S&P 500 has traded within a wider range (1540-1564), i.e. volatility has been rising. This expanded high-low range is bearish to me as long as the index is unable to get through the 1565 level. It indicates distribution is occurring, which is typically not a bullish occurrence. The wide bid/ask spreads infer that buyers and sellers are indecisive and reacting to external events with great uncertainty.

What is forming is an ascending triangle, with higher lows and stalled (flat) highs. Again, we will see if this triangle breaks out to the upside through 1565 or to the downside through 1556. Needless to say, a break above 1565 will confirm that we remain in a bullish uptrend (risk-on). However, if this ascending triangle were to breakdown in a meaningful way, it could indicate that the tide has turned and prior built-up momentum has finally been worked off. I would then reassess my bullish stance on the market.

Wednesday, March 27, 2013

Bullish Crude Oil Chart

The technical outlook for crude oil (WTI) remains bullish. 

The hourly chart shows crude in a nice uptrend with a recent breakout through $94. The daily chart below it displays a more complete bullish picture, with crude breaking through a declining trend line this past January, pulling back to the rising trend line and has since rallied to the $95-$96 level.

But similar to my questions concerning the Eurozone in recession and yet respective equities remaining in an uptrend, I wonder why crude oil appears bullish when all we hear about is how the supply of crude oil is booming thanks to fracking...? With rising supply and presumably flat demand (although reports are demand is actually in decline), shouldn't the crude oil chart look bearish?

I suppose the chart is suggesting that despite the increase in crude supply, it's still not enough to meet demand, namely future demand, as global economies are expected to continue to improve. Whereas the Eurozone is in recession, the two largest economies in the world, U.S. and China, are in recuperation mode and perhaps crude is reflecting the anticipation for enduring improvement.

As always, I don't pretend to know all the answers, instead choosing to respect what the charts are telling me. In this case, my take is the outlook for crude oil remains bullish.

Monday, March 25, 2013

Eurozone in Recession, yet Equities in Uptrend -- Huh?

With Cyprus being a big topic in the news, we're hearing more about the eurozone and in particular the economy(s) in that region of the world. The latest Eurostat data confirms that many of the economies in the eurozone are indeed in recession. The chart below further illustrates this weakness.

 Source: Bloomberg

The Citigroup Economic Surprise Index is a measurement of economic data surprises, reflecting the extent economic data releases are generally coming in above or below consensus expectations. When the Index is falling like in the chart above, it suggests not just that the economy is in trouble but also that the economic data being reported is worse than expected and therefore was likely not already priced-in or discounted. 

Expectations are what drive markets and if the eurozone economic data has been worse-than-consensus the last several weeks, one would expect eurozone equities to be in decline. However, take a look at the EURO STOXX 50 Index:

Source: Bloomberg

It's been steadily rising for months. 

Typically stock markets discount economic recessions six to nine months ahead of time, and yet while the eurozone currently finds itself well within an economic downturn, its equity index has been painting quite a different picture, one that is quite bullish. 

I remain perplexed. 

Also, note that the EURO STOXX is not overly represented or correlated with Germany, the strongest of the euro markets. The chart below shows stock indices for France, Italy and Spain, equal-weighted:

 Source: Bloomberg

If the eurozone is in a recession, someone forgot to tell investors!  

Tuesday, March 19, 2013

Is Cyprus a Big Deal?

Regarding the question of whether or not Cyprus is a big deal, the answer is: who knows?! And anyone who tries to tell you they know exactly how things will unfold is just guessing. Yes, Cyprus is a tiny country with a tiny economy, but that's not the point. The larger issues at stake have to do with precedent going forward and public perception of potential risk.

While Cyprus has a GDP the size of a small city in the U.S., what really matters here is will this new type of bailout involving taxes become a precedent going forward for all euro countries. Much of the contagion risk hinges on how the public perceives things now and in the near future. Depending on how events unfold, it could cause bank runs as individuals in other euro countries decide it’s not worth keeping their money in the bank if there’s the risk they’ll wake up one day and 10% or more of their deposits are gone due to a tax.

On the one hand, Germany did not want to bailout an essentially bankrupt Cyprus banking system, instead choosing this time to put some teeth or pain in the conditions (esp. with Merkel election upcoming). However, if panic and bank runs do ensue, Germany stands to lose the most as it benefited the most with the intro of the euro, and an unraveling euro system stands to leave Germans with many billions in failed bailout losses. Quite a pickle, requiring delicate handling. But again, the complexity of the situation and myriad of domino effects that could result are just too unknown to be assured of an orderly outcome.

Something to keep an eye on is the Cyprus CDS chart.

Source: Bloomberg

Yesterday it jumped by 50% to 896, but you can see it's been much higher in the past. Much of the CDS rise last year was due to Greece (Cyprus & Greece banks very intertwined). But if this CDS continues to climb, it's a tell that Cyprus could become a bigger deal than is currently assumed.

Friday, March 15, 2013

Euro Chart Still Looks Bullish

I continue to believe the euro is undergoing a healthy pullback within a larger bullish inverse head & shoulders pattern. Further supporting the technical outlook for the chart, the ECB balance sheet has been shrinking.

                            Source: Bloomberg

Meanwhile, the Fed's balance sheet continues to expand. Net net, a bullish dynamic for the euro to appreciate.

In addition, note that a rising euro has been positively associated with the risk-on trade. The exhibit below shows the euro (FXE) versus commodities (CCI), generally regarded as a risk-on surrogate. The rolling 100-day correlation between the two has been positive.

Source: Bloomberg


It Remains Risk-On -- Until Not

I realize in many respects the market is looking toppy, especially considering that the DJ Industrials have recorded 10 consecutive up days, a very rare occurrence. And we're within a few points away from Tom DeMark's call for a top in the S&P 500.

However, as I wrote previously, market tops can take some time to fully develop. And that's particularly true if the current rally has been characterized by extreme, compressed momentum -- as is the case with this YTD rally.

Until the market begins to demonstrate more technical red flags, the bias remains risk-on.

I keep an eye on several indicators and metrics that attempt to track where we are on the risk-on/risk-off spectrum. Many involve calculating relative movement between a known risk-on vehicle versus a safe-haven, risk-off vehicle.

For example, the following chart shows the Morgan Stanley Cyclical Index (CYC) versus the Consumer Staples SPDR (XLP) in the lower inset. When CYC is outperforming XLP and the relative line is ascending, the S&P 500 (upper inset) tends to do well, and vice versa.

How I use this chart is I track the CYC:XLP versus its 100-day moving average and when the CYC:XLP line crosses up through its 100-day MA, it's risk-on and vice-versa, when the CYC:XLP pierces down through the 100-day MA it's risk-off. The blue arrows on the S&P 500 indicate the MA crosses. Since October 2006, there have been 11 signals or MA crossovers and as you can see, they've been more right than wrong in terms of gauging the risk-on/risk-off environment and getting on the right side of ensuing market direction. I would never make a decision using just one indicator or input, but other metrics I follow in this regard look similar.

As I wrote in the headline, until proven otherwise, it remains risk-on.

Thursday, March 14, 2013

More on gold

I apologize for the overkill on gold, but a few more exhibits....

Forward expected inflation remains below the Fed’s target 3% rate, implying Bernanke has leeway to keep his foot on the pedal regarding QE. Fears of him taking away the punch bowl anytime soon are overblown.

Source: Bloomberg

From the looks of the Fed balance sheet, which continues to expand, Bernanke is indeed pressing down hard on the pedal.

 Source: Bloomberg

We know historically gold has significantly higher returns when real interest rates have been negative, which remains the case today.

Wednesday, March 13, 2013

GDXJ, GDX and gold

Could this finally be the start of a lasting run in gold equities? The GDX has been quietly rallying for the last six days:


Note the much higher volume on advances with volume shrinking on declines = bullish action.

What’s even more encouraging is the relative performance of the GDXJ vs. GDX (see below), junior miners vs. majors. It tends to show a similar relationship as the Russell 2000 Index vs. S&P 500 -- smaller-caps outperforming larger-caps is generally bullish, indicating “risk-on” mode.


Granted a few days does not make a meaningful rally. But we know these stocks are beyond washed out so any kind of positive move is constructive, indicating at least the chance a solid bottom has been established and even investor appetite is picking up for these extremely-depressed stocks.

What does this mean for gold bullion? Typically when the junior miners outperform their senior brethren, it’s been decent as a timely indicator for gold. (Not much history given the inception date for the GDXJ is November 2009).


The chart above shows gold in the upper inset and GDXJ vs. GDX with its 100-day MA in the lower inset. When the GDXJ:GDX line has crossed up through its 100-day MA, it has tended to be a fairly good buy signal for gold.

In addition, looking at the weekly chart of GDXJ:GDX, there are more than a few bullish items evident.


Note a bullish Golden Cross (50-dma moving up through the 200-dma) is very close to occurring. Also, you can see the GDXJ:GDX is oversold. Referring to the MACD, it has spent over a year trending up, creating a bullish divergence.

Finally, the GDXJ vs. GDX has registered not one but two weekly Tom DeMark Combo 13 signals, typically indicating bottoms.

                                                                                                                                               Source: Bloomberg

All in all, I remain bullish on gold bullion, and I'm getting increasingly less negative on gold equities. Stay tuned.

Monday, March 11, 2013

Tom DeMark calls a top for the market

Last week, Tom DeMark came out publicly stating he felt the S&P 500 would top out at 1567.

I've been a user of DeMark indicators for 10+ years and have found them to be quite powerful. Granted, they can be tricky to interpret and it's taken me years to grow comfortable with their nuances. But nothing is the "Holy Grail," meaning one should never put too much emphasis on any one indicator, instead preferring to use a suite of uncorrelated tools to help make decisions.

That said Mr. DeMark has made many prescient calls over the years, the latest being his call in December for China's Shanghai index to rally -- not bad! I respect his calls, however I still believe risk-on remains the prevailing market bias for the near future. As I wrote previously, the YTD rally came with extended and robust momentum, which typically has carry-through in the form of thrust. I'm not saying 1567 won't be a top, it could very well be, assuming we get there. But fortunately tops take time to form, in contrast with more fast-and-furious declines to bottoms, and as such I believe we'll have time to assess things over the next few weeks and make a decision then if indeed the market is acting as if a top is in.

In the meantime, I show below three SPY charts which I feel support what Tom is considering in his market call. He particularly highlighted that when 13 signals register across all three time frames (daily, weekly, monthly), it has been very powerful.


 Source: Bloomberg

Tuesday, March 5, 2013

Gold, the Gold Lease Rate and the Fed Balance Sheet

I remain bullish on gold. Yes, I realize bullion recently registered a Death Cross (50-dma crossing down through the 200-dma), however I have found in general moving averages to be less effective for commodities than for equities. That's not to say I don't respect commodity price action around key moving averages, just less so than I would for stocks and other vehicles.

I find the gold lease rate to be a helpful input when it comes to assessing gold. 

                                                                                                                 Source: Bloomberg

Note that when the lease rate rises, gold tends to decline, and vice versa. As you can see, the lease rate has more or less been in an up-trend since gold's peak last October (again, lease rate rises, gold falls). The lease rate is currently at an elevated level that has historically often coincided with a bottom for gold. In fact, I have found that when the lease rate moves to an extent where it meets its Bollinger Band, it often indicates the trend is getting stretched and a reversal is likely imminent. Over the last few weeks, the lease rate has risen with and pressed its upper Bollinger Band.

I would also point out that gold, shown in the lower inset in the chart above, has held at or above the support line (in red) that spans back to 2011. This line resides around the 1550-1560 level.

I would further state that when one considers that Ned Davis Research (NDR) recently released a report showing the sentiment for gold is at an extreme low, with sentiment on the metal excessively pessimistic and bearish, the chart for gold looks even better. NDR regards anything below 35% as bearish sentiment and currently the reading is just 7% (!), but with that in mind I would've expected to see a chart that looked much worse than what we see for gold. To me that says that despite such washed-out, negative sentiment, gold is hanging in there fairly impressively, suggesting while psychology is very bleak, actual selling has not been nearly as bad (i.e. if this is what the chart looks like with near rock-bottom horrible sentiment, I'll take it!). And as is the case with sentiment, it's a contrary indicator, so extreme pessimism is very bullish for the near future.

Finally, take a look at gold (GLD, red line) versus the Fed balance sheet:

                                                                    Source: Bloomberg

It's not surprising to see such a tight relationship between gold and Fed action as conveyed by its balance sheet ("follow what they do, not what they say"). It's interesting to observe that from the summer of 2011 to September of last year, the Fed's balance sheet more or less remained flat -- no growth, zilch. And not surprisingly, the price of gold more or less went nowhere.

However, you can see in the chart that since October 2012, the Fed's balance sheet has been growing in impressive fashion. Historically, that's bullish for gold. But also note that when the Fed balance sheet is growing/rising and gold is not, instead either traversing sideways or even declining (blue squares), more often than not we've seen gold revert course and rise in price, getting back in synch, so to speak, with the Fed. There are no guarantees we'll continue to see this tendency hold, but you can see a significant divergence currently developing, with gold declining as the balance sheet expands.

Sunday, March 3, 2013

Euro Chart Remains Bullish

The euro is forming what looks to be a fairly huge bullish inverse head-and-shoulders formation.

Granted, it's not a perfect H&S pattern given the tilted neckline, but valid H&S formations do not always have to be perfect. The neckline was breached late last year and has since undergone a very-common pullback to the neckline. Such a pullback or retrace is often followed by a resumption of the prior trend, in this case being up.

The neckline provides support at about the 129 level. In addition, the 200-day moving average (MA) serves as further support at 128. It's also worth pointing out the bullish "Golden Cross" that occurred last year in late October and remains intact.

RSI and stochastic indicators reflect oversold levels for the euro, inferring selling has been overdone. A rally should soon ensue.

With the euro chart appearing quite bullish to me, overall it further suggests that one should continue to be in "risk-on" mode. Although I have been expecting an overdue market correction with the S&P 500 retreating to the 1460-1480 level, such a retrenchment would be a healthy pullback within an existing uptrend. Given the significant momentum occurring during the YTD market advance to February 19, it would be rare for the market to top out at this point. Typically this kind of built-up momentum serves as forceful thrust that works to carry the market higher after an initial correction. We may eventually get a final peak in the market -- just not yet.

Regarding a rising euro equating to risk-on mode, over the last several years the euro has been positively correlated with equity markets.


The above shows the rolling 100-day correlations for the euro vs. the S&P 500 and MSCI World Index (ex USA), respectively. You can clearly see a positive relationship as correlations rarely dip below zero. As long as the euro maintains a bullish outlook, it should be a tailwind for equities.