Friday, March 29, 2013
Thursday, March 28, 2013
Wednesday, March 27, 2013
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
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.
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:
If the eurozone is in a recession, someone forgot to tell investors!
Tuesday, March 19, 2013
Friday, March 15, 2013
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.
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
Wednesday, March 13, 2013
Monday, March 11, 2013
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.
Tuesday, March 5, 2013
I find the gold lease rate to be a helpful input when it comes to assessing gold.
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:
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
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.