All day and every day, some of the stock market's best and
brightest traders and money managers share their ideas, insights,
and analysis in real-time on Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
FTSE 100: Why Poor Earnings May Not Be the Reason for
On Friday, the UK's
(INDEXFTSE:UKX) index dropped from a seven-week high. Shares of
HSBC got downgraded that day, and that was said to be the culprit.
However, from an Elliott wave perspective, the real reason was the
fact that the index is likely nearing a top of its corrective
On June 27, we wrote on these pages that the FTSE had finished a
5-wave decline for a larger-degree wave 1,
and a rebound in wave 2 was due
Since then, the FTSE rose 380 points, a 6% gain. And looking at the
wave patterns today, prices appear to be grinding into a short-term
For one, the May-June decline was a clean five-wave move; those
define the trend in Elliott wave analysis. Prices are losing
momentum now, as evidenced by the bearish RSI divergence shown on
the daily chart below (red dot).
Next we need to see a downside acceleration soon to justify a
bearish outlook on UK equities. Today's close of 12 points lower
might be the start. Only a push above 6700 on the FTSE 100 will
have us reviewing alternate scenarios.
For those who wish to try and take advantage of this potential
near-term opportunity, there is a multitude of
with European exposure to consider.
(Adapted from Elliott Wave International's July 19
European Short Term Update
, edited by Chris Carolan.)
The FOMO Market
The unrelenting rise in U.S. stocks continues as the Fear Of
Missing Out (FOMO) propels investors into what may now be a very
crowded U.S-centric trade. Meanwhile, homebuilders (NYSEARCA:XHB),
which I have discussed several times before, continue to lag on the
realization that spiking mortgage yields don't actually bode well
for the biggest source of reflation the economy has.
Counter-balancing this is strong movement in emerging markets,
which we continue to track closely for an allocation in our mutual
fund and separate accounts.
Euphoria can easily continue for domestic markets, but I'd rather
play mean reversion from the bottom than the top. Further momentum
in emerging market equities, should it hold, could be a beautiful
trade. What's coinciding with this? A continued breakdown in the
dollar, which has a trend that seems to favor near-term.
An interesting story hit the wires Saturday, which commodities
markets, in their usual complacency, have failed to react to so
far. Basically, the Feds are sending signals that they intend on
reviewing the 2003 decision
that allowed banks to trade in physical commodity
Then this morning, we get the story that a US HFT oil trader was
fined $903,176 for deliberate manipulation
. Are the US and UK joining forces and preparing an attack on oil
speculators, who have driven the price up to such dangerous levels,
levels which analysts cannot justify? That would certainly put an
interesting twist on matters as we approach the critical mass 110
level. Moves above 110 have coincided with heavy drawdowns in
equities the past two years, -20% in 2011 and -10% in 2012 (see
Everyone's Gone to the Moon
Yesterday's headline read, "Dealbreaker reports that an unnamed BMO
analyst is leaving the firm for the opportunity of a lifetime. Dear
Colleagues (he writes), it is with sadness that I am emailing you
to say farewell on my final day here at BMO. However, it is with
great pride and excitement that I am able to announce my future
plans. Just this week, I was informed that I was selected from
among tens of thousands of applicants to participate in a highly
experimental civilian travel program coordinated by NASA and the
U.S. government. In September I will pack my bags for Florida where
I will begin a one-year training program, which will culminate in a
six-month trip to the International Space Station." "To the Moon,
Alice," to quote that great American economist Jackie Gleason; and
that is what yesterday's trading action felt like - that everyone
had gone to the moon.
Obviously, there isn't much to say about Monday's trading other
than the only way to make money was to erect a "toll gate" at last
Friday's closing price (1692.09) and collect a toll every time the
(INDEXSP:.INX) (SPX/1695.53) crossed that flat-line because it
crossed it a baker's dozen of some 13 times. The session was
punctuated by the revelation that more money flowed into equity
centric ETFs this month than in any month in the past five years.
That caused Jason Goepfert, of the must have Sentimentrader.com
organization, to write, "The Liquidity Premium for the S&P 500
(10-day average) just entered extreme territory, suggesting that
investors have become more comfortable holding individual stocks
instead of the 'safety' of the exchange-traded fund. Past
corrections have usually seen the 5-day average hit an extreme,
then the 10-day, then finally the 21-day. The latter isn't yet at
an extreme, so it's something to watch for in the coming weeks (see
That news caused my phone/email to light up with the question,
"With all the money flowing into the equity markets, don't you
think you are wrong about a pullback?" My response, "Well, markets
can clearly do anything, but in this business you have to play the
odds; and such headlines are what you tend to see clustered near
trading tops." In addition, to all the reasons given over the last
few weeks for my short/intermediate "topping call" in and around
July 19, it's worth noting that over the past 10 years, nine of the
10 macro S&P sectors have declined from here into the first
week of August. Manifestly, in this business you play the odds or
they carry you out in a "box." Moreover, while certain indices are
breaking out to the upside, others are breaking down. Meanwhile,
the entire equity market is WAY overbought.
Click to enlarge
The weekly JPMorgan Treasury client survey was released this
morning and remains relatively long.
-Longs up to 23% from 21%
-Neutrals down to 64% from 66%
-Shorts unchanged at %13
-Net long up to %10 from %8
This is the most aggressive net long positioning since November
2012 and is a cautionary reading for pressing any bond longs here.
The positive side is that if this long positioning is sustained
over the coming weeks, it will be a much better medium-term bullish
signal. Over the last two weeks, active positions have covered
their very aggressive shorts and remain more neutral.
Regional banks remain for sale from the open with the
S&P Regional Banking ETF
(NYSEARCA:KRE) peeking into negative territory, despite a 10-year
yield that is ~4 bps higher.
) was weaker than expected and last night
) seemed to do decently enough. Could it be that the miss by RF
after a slew of strong financial earnings (vs
consensus/expectations) is causing the weakness? So ya see it.
The Richmond Regional Manufacturing figure is quite bad, but it is
strikingly different from the manufacturing data we've received
thus far in July. Overall, it looks like activity slowed down
markedly. My guess is that we'll see strong manufacturing activity
continue into August before peaking before the fiscal debates that
begin in October.
NYSE all-securities breadth was 1.5:1 at 10:10 this morning, with
the A/D line at +433. Volume yesterday was quite low with only
583.79 million shares changing hands on the NYSE. For perspective,
the July 5 quasi-vacation day saw 625.38 million shares trade and
428.04 million on July 3.
Going off the reservation a little bit here... this morning, the
Turkish central bank hiked overnight rates by 5bps to 7.25% and
said they have the scope to hike a lot more in an attempt to stem
the mass of outflows from the country. I've been keeping a wary eye
on Turkey to see what's going on and the research I have read
suggests that there is another 1.5%-2% of hikes possible. This is a
problem in and of itself because the Turkish yield curve is
inverted from the 2yr point and out with bill rates not far behind
from being inverted with any rate hikes.
Additionally, Indian yield curves are also inverted or flat from
3-month bills out to the 30-year rate. I bring this up because
India has been tightening monetary conditions and draining currency
reserves from the market. A -1bps spread between 3-month bill rates
(8.6%) and 30-year bond rates (8.59%) is highly negative and bad
for emerging markets.
Brazil is probably next with their 2-year rate at 9.83% and 9-year
rates at 10.59%, narrowing from a 107bp spread a month ago.
What does all of the above mean? Either monetary conditions are too
tight or the market is discounting contraction in both of these
economies. As it pertains to India, it means that the Indian
central bank has tightened too far - either way the country is
screwed - because the capital outflows will continue at a
frightening rate, which jeopardizes future growth should they start
to ease. If the central bank tightens further, it will choke off
further domestic growth.
I gather the hikes in Turkey and other emerging market problems are
behind the alarming underperformance in TIPS over the last couple
days as real rates rise. This is the second day in a row that I've
noticed the outsized underperformance, which is a negative for risk
taking into the near-future. Longer-term (5-year and 10-year) rates
are coming down, but at a slower pace.
I have my bid out for the muni CEF I'll be looking to add to today.
I'm keeping an eye on the
) earnings call; I'll be back with any gleanings shortly.
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Wednesday, July 24
Holy Moly Facebook!
) just made itself the star of earnings season, putting in a huge
EPS came in at $0.19, $0.04 ahead of consensus. Revenues were $1.81
billion, smashing the $1.61 billion consensus.
Mobile advertising was an amazing 41% of ad revenues, up from 30%
last quarter. That is just plain crazy growth.
The stock is up about 16% in extended trading to $30.74.
A Little Cyber Security
Some stocks just run then flag, run then flag, etc... I found a new
one while looking around for some additions TO the technology side
of my portfolio. Now, while I am not as plugged in as Sean Udall, I
do like to pick apart balance sheets and carve up an income
statement. Lets look at
Check Point Software Technologies
). It is an interesting stock that has had a very nice move.
From a fundamental perspective, it still looks cheap. it is
increasing free cash flows consistently, up 10% this year, while
total current assets are about 20% of the current market cap! Plus,
the company is looking to expand its network security business with
additional add on features. Net margins are 46%, that's not a
typo... seriously 46% and only trading at a 14 forward P/E.
OK, fundamentals are solid, how is it technically? In a sentence, I
wished I had seen it mid-June when it showed my favorite pattern, a
50-day tap after a golden cross. It is still good now. It put in a
nice flag, then broke out on earnings. It retested and filled the
earnings gap as well as the flag breakout. That looks like healthy
back and fill for continuation higher to me. I'm adding it today
and will look to continue building a position over the coming weeks
on pull-ins. It should stay above 53, to keep the momentum going,
and I will use that prior resistance area as a stop out.
Click to enlarge
Short-Term Warning Signs
I've been trying to ride this trend at key points, but I find
myself with the least exposure I've had in a while
All three of these charts are flashing some short-term "warning
signs" that are noteworthy.
It never hurts acknowledging them, especially for the super-active
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Thursday, July 25
Is a Bottom in for Broadcom?
It looks to me like
(BRCM) put in a bottom earlier today. This doesn't mean I'm going
to get silly long, but as I sell down other winners, this will be a
place for fresh money.
In my view, the stock shouldn't have fallen below $30, but that is
what stocks do sometimes. As I said yesterday, I think the worst
case scenario is that I'll be selling shares between $31-33. But
there could/should be future catalysts which push the stock to
something much closer to a peer-group valuation, which would be
30-40% higher from current prices.
Chart of the Day: Homebuilders Vs. Banks
For today's chart of the day, we decided to look at the
relationship between homebuilders (NYSEARCA: XHB) and the S&P
Regional Banking ETF the
KBW Banking Index
Over the past year, you can see that all three basically trading
in-line with each other. (chart 1)
However, over the past few days, the homebuilders have been getting
smashed as industry data has gotten a bit shaky and homebuilder
earnings reports have been weak. (chart 2)
For those concerned with housing's impact on the financials, the
action in the space is worth nothing
Click to enlarge
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The Case for the Fed to Buy Some Yen
Our April argument had been that if Abenomics succeeded in making
Japan more competitive and hence effectively exporting its
deflation to the remaining world, then classic inflation hedges
like gold and TIPS (which had been bid up over the past few years)
should be sells.
As this theory played out in practice, the sell-off in the
overbought TIPS markets caused real bond yields to spike while
inflation printed lower, thereby causing real rates to move from
negative to positive territory. Reflexivity caused this panic to
feed of itself worsening the situation in global fixed income
In our May 24 Quant Crystal Gazer note on the Mexican Connection,
we argued that it suited the purpose of the Japanese government as
well as the Fed To let some air out of the "yield chasing" behavior
in the bond and equity markets. For this purpose, we saw the
Mexican market correction as a classic placeholder for other
With the breather becoming a painful gasp -- the Fed needs to
reduce real yields. Reversing the above sequence of events should
then be the logical solution.
Ideally, the Fed would like to re-engineer moderate inflation
expectations while keeping the fixed income risk premiums in check
with the continued or enhanced Bernanke put.
Appreciation in the Japnese Yen should reverse the
Japanese-exported global deflationary trend and enable the Fed to
purchase moderate inflation expectations.
A calmer bond market convinced about the sustainability of the
Bernanke put would in turn flatten the yield curve and enable real
rates to reduce.
The Chinese maybe tracking this dynamic rather closely as they have
possibly been the most severely affected by the Japanese strategy
which caused the CNY-JPY to appreciate to decade highs.
A consequently weaker dollar could also revive the dollar carry
trade and theoretically benefit global equities
Friday, July 26, 2013
Click to enlarge
Ahead of the consumer confidence number at 9:55 a.m. ET (consensus
= 84), we are a bit off the lows but definitely in risk-off mode.
In a turnaround from recent action, the
(INDEXRUSSELL:RUT) is underperforming the S&P 500, crude oil is
down, and yields are down. Housing also had a nasty start, moving
down about 1% before recovering a quarter of the loss.
This is healthy as the market needs some cooling off time since the
run off the 6/24 low, during which we've seen what's been a
mediocre earnings season and mixed economic data.
I posted a chart of the SPX versus the
(INDEXCBOE:VIX) below. Note that the VIX is just about the levels
we saw during the May high while the SPX has actually exceeded
those levels and is still near the all-time high set on Tuesday.
Flight to Safety
There seems to be a slight change in patterns today, and my guess
it's related to the
(INDEXNIKKEI:NI225) overnight drop. Noticeable flight to
bonds/treasuries is still holding as I type even after the
sentiment beat. This is an early diagnosis, so it's subject to a
complete reversal. Nevertheless, this was the tape overnight and at
the open and should be noted.
CBOE Interest Rate 10-Year T-Note
(INDEXCBOE:TNX) 2.569% back in the spotlight. ZN resistance is
126'230, 126'280 and 127'0115. Support s 126'180 and 126'140.
Nine times out of ten, in the arts as in life, there is
actually no truth to be discovered; there is only error to be
-H.L Mencken, American journalist, essayist, editor, satirist,
critic of American life, and scholar
And yesterday, the only "error" was my call for a trading top as of
last Friday. Of course, my window of opportunity for a downside
feint remains from mid-July through mid-August, but so far the
equity markets have remained resilient. Nevertheless, the expected
weakness occurred Wednesday night with the S&P 500
(SPX/1690.25) printing lower yesterday morning by about 12 points.
Subsequently, the SPX opened down by 5 points, rallied into the
10:00 hour, stumbled into the 11:30 a.m. "pivot point," before
rallying back to the "flat line" at noon. As a sidebar, there are
two "pivot points" during the trading day; one is around 11:30
a.m., before the pros go to lunch, the other is at 2:30 p.m. as the
pros "square" trading positions for the "close." Yesterday was a
perfect example of that sequence with the session's low arriving at
11:30 a.m., with a rally peaking at ~2:00 p.m., followed by the
pullback that bottomed between 2:30 and 3:00 p.m. The resulting
rally lifted the senior index into the closing bell. While that
action has not deterred my cautious stance, it did surprise me.
Click to enlarge
Whatever the outcome in the short term, I remain bullish over the
longer term embolden by my sense we are into a new secular bull
market. One of the drivers for that stance is next week's release
from the Bureau of Economic Analysis (BEA), which is rejiggering
all the GDP figures since 1926. The reason is my long-standing
belief about the benefits of "intangible capital," which previously
have not been reflected in the official figures. When Intangible
Capital is included in the economic figures, our economic reports
change; and, they change profoundly! It is shown that we are saving
more, investing more in the future, generating more cash flows,
growing GDP faster, etc.
And, that was the point of a conference call with my friend Steve
Vannelli yesterday afternoon, whose fund I own [see the attendant
chart of the
GaveKal Knowledge Leaders Fund
(GAVAX)]. In said call, Steve talked about the world's most
innovative companies that are accruing "intangible capital," which
is not being recorded by our accounting metrics. That is about to
change, and the change is going to be impactful not only for the
GDP figures, but for individual companies. To be sure, the moving
of "intangible capital" into the "dedicated economics of
activity/output unto itself" will raise the level of GDP growth,
raise the level of corporate profitability, reduce debt ratios,
increase net margins, etc. This morning, however, the markets seem
worried about next week's Fed meeting, leaving the S&P 500
futures lower by 5 points.