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.
As you can see on the chart below, the monthly TDST Setup indicator
has had a flawless record of marking tradable highs/lows for the
PowerShares DB Agriculture Fund
(NYSEARCA:DBA), and it should complete yet another TDST Buy Setup
at the end of July. Incidentally, by the end of the month there's
also the likelihood that DBA will complete a weekly TD Sequential
Combo Buy 13, which remains outstanding from when the TDST Level
Down was broken on a qualified basis. The coincidence of selling
exhaustion indicators on multiple longer-term time frames, would
provide a very low risk entry point. The one double-edge variable
on the monthly chart is whether the Buy Setup will complete above
or below the TDST Level Down at $23.79. If the former, all the
ducks would then be lined up to get long; if the latter it may be a
Click to enlarge
Breaking Bad or Breaking Out?
I am scanning through sectors to get some clues for the next
direction. I see a lot of sectors breaking out over their
respective downtrends today. Transports, retailers, and several
others. Oh and by the way, have you looked at the banks lately?
These are usually bullish continuation sectors when leading. Just
sharing what I see.
As I run through these sectors, I am going back into portfolio mode
and adding back select names as we have recaptured the 50 day
moving average in the
(INDEXSP:.INX) . I too, am surprised by both the brevity and
shallowness of the correction, but now is a great opportunity to
buy high-quality stocks.
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NQ and ES Levels
(Nasdaq 100 future) found support Friday at the July 3 naked VPOC
of 2929 and is trying to work its way up to the June 19 naked VPOC
at 2986.75. That same move for
(S&P futures) would put upside risk now at 1643.50. Looking for
confluences up there, we have the ES weekly R1 at 1642.25. Closing
above those levels would pretty much be the end of the line for
bears. But this is Monday, and the week before option expiration
week with a lot of headlines to boot. In fact, such a big open
before all the upcoming events is a bit suspicious, to say the
least. Levels where bears regain strong control would be below ES
1620 and NQ 2946.75.
(NYSEARCA:GLD) gapped down last Wednesday in an attempt to
discredit the Gilligan buy signal it left on June 28.
However something funny appears to be happening on the way to the
bear cave and another leg lower.
GLD is offsetting last Wednesday's gap and is verging on attacking
last weeks high which will turn the Weekly Swing Chart up.
If the turn up plays out and GLD extends it is in a stronger
position to attack its overhead 50 dma.
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10-Year Notes Surge Higher: Bull Trap?
Vadim Pokhlebkin - Elliott Wave International
This past Friday, yields on the 10-year US Treasury note saw their
biggest jump since August 2011. But on Monday, the tens rose (and
yields fell). Is it a bull trap, or is the reversal for real?
To help answer that, let's turn to Elliott wave patterns. The
basics are simple: five waves in the direction of the main trend
(an impulse), and three waves against it (a correction). Impulses
are strong, fast, and with little internal overlap; 3rd waves are
usually the strongest. Corrections, on the other hand, are
hesitant, choppy moves.
With that in mind, please take a look at the chart of the 10-year
U.S. Treasury notes, below.
As you can see, prices have moved swiftly lower in recent weeks,
with little overlap. Yet the upward push from 124-115 has had the
opposite look and feel. That's why the ongoing price spike most
likely is part of the developing upward correction, an ABC.
The larger-degree wave 1 (circled) is now labeled complete at
124-115. The five-wave advance off the low is now the first leg of
an ABC zigzag, the developing wave 2 (circled).
This wave count opens the door for additional strength within the
125-235/126-100 area. Pivotal, near-term support lies at 126-100.
(Adapted from Elliott Wave International's
Interest Rates Specialty Service
Click to enlarge
A Historic Mispricing
Two weeks ago
, I pointed out how the 2y5y curve was steepening extremely
sharply, which would typically mean that the Fed is set to turn
into an easing cycle. They are doing the exact opposite, though by
all money market standards, they remain very easy in the literal
The reason that this curve is steepening is technical in nature
because the forward path of the Fed Funds rate does not account for
any rate hikes until mid-2015, which means the 2-year will reflect
a zero rate for the life of the note. The 5-year is pricing in a
normalized Fed Funds rate by the 5th year (when pricing the term
premium or forward rate). This is where the Fed's policy of forward
guidance is blowing up in its face, but on to more important
This has left, in my opinion, a historic mispricing in the market,
as it prices in the fastest rate of tightening in history.
Unfortunately, the average Joe cannot throw around a leveraged
$100mm to play a 2s5s or 2s3s flattener (selling the 2yr, buying
the 5yr) in the UST market, but you can in the Eurodollar futures
market. Eurodollar futures are essentially a 3-month LIBOR future,
meaning betting on an implied rate for 3-month LIBOR at a certain
time in the future.
Historically, 3-month LIBOR has averaged 25bps more than the Fed
Funds rate. The result of this spread remaining flatter in an
"easy" market is due to the complacence of everyone thinking that
the Fed will buy every bond in sight or never raise rates. The jury
is still out on the extent of the latter, but the former is
On last Friday, the June 2015 vs June 2016/2017/2018 spreads (or 2y
vs 3, 4, or 5y) all hit historically steep levels and offers an
insanely lucrative risk-reward. From these levels, the spread will
flatten for a variety of different reasons which I will lay out
below. Playing this kind of spread trade also offers very little
directional risk like outright long Treasuries, but with the same
mindset that the Treasury is mispricing the rate of tightening into
The spread will tighten/flatten if:
-Economic data improves at a faster rate than Fed forecasts or
market forecasts as the 2-year yield will rise at an increasingly
faster rate than the longer duration (2y3y has best return in this
-Economic data worsens or does not improve vs Fed forecasts or
market forecasts, the longer duration yields have a long way to
fall if this is the case (2y5y has best return in this instance).
-Financial stress short of a catastrophe, historically, will cause
the shorter-duration LIBOR futures to rise at a faster rate than
The spread will widen/steepen if:
-The financial system undergoes a catastrophic 2008 meltdown. In
that instance, LIBOR futures will price in a higher rate of
financial stress further and further out as banks hedge their
balance sheets against higher funding rates. This is why a number
of people, myself included, were freaked out over the past few
weeks because of the rate at which these curves steepened, the only
other time it has happened in that magnitude was during
2008/Lehman/Bear Stearns, not even that bad during LTCM's blowup.
-The Fed changes guidance or thresholds for its forward rate
policy, causing longer rates to price in a higher Fed Funds rate
later while the 2-year is unmoved.
The spread will do nothing if:
-Market and Fed forecasts are right on the money. If you hold this
trade longer and roll it forward, there is an equal chance that it
could flatten or steepen from here, though the odds of it
steepening are slim given historical spreads that have little room
to steepen further.
The spread is more exacerbated in Eurodollars. For example, the
spread between the June 2015 and June 2016 is 106 points while the
2y3y curve is only 32bps, and so forth the further out you go.
Please keep in mind that ED futures have 2000:1 margin leverage, so
it's not a risk-free game. The spread trade is designed to reduce
that risk and avoid any outright directional risk.
Charts below included for visual color are the 2y5y curve, Fed
Funds rate vs Jun 2015 - Jun 2016 and Jun 2018 spreads, and Jun
2015 - Jun 2016 historical spread.
Thank you to Vince Foster and Kevin Ferry for assistance in
explaining Eurodollar futures mechanics
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Wednesday, July 10
Clear and Present Markets
1. Pay attention to news about the remilitarization of Japan. At a
time when the US is under pressure to cut its largest budget line
item, one way to do this without negatively impacting the
profitability of these companies is to sell more technology to our
allies, and Japan is a massive economy with little military power.
This is a theme we have been watching all year, as a new Chinese
Administration came to power and the dispute over the
Senkaku/Daioyu Islands. As Japan builds out its military
capabilities, it will be done as a "defense Force" emphasizing
missile defense and emergency response over first strike
) should be a primary beneficiary of this strategy. I would be
cautious though of
) though, as its F-35 Joint Strike Fighter appears to be a plane
that does not suit the modern threat environment, and is facing
order cancelations from allies.
2. Chinese trade data showed 3.1% decline in exports in June. This
is part of the government's strategy to reorient the economy more
toward more sustainable domestic consumption and away from exports.
This entails consumer spending to increase from 34% of Chinese GDP,
and move closer to the 70% of GDP seen in developed nations. It
should also be noted that the new administration is cracking down
on the illegal transfer of funds off-shore, which a report by
Global Financial Integrity estimates was ~$3 trillion over the last
decade. The report noted that 90% of this money was transferred
through fraudulent invoices, which would have skewed historical
trade data. No one believes the Chinese data anyway, but building
credibility in the economic data will be important as the new
administration attempts a difficult restructuring.
3. With Bank earnings coming this week, I think analysts may be
overestimating the ability of the banks to take advantage of higher
interest rates. The banks will have to write down the value of
fixed income securities in the Available For Sale (AFS) category,
which is probably a one quarter event in the short term, but most
have not been writing a bunch of new loans at the higher rates
(according to the Fed H.8 data). The categories that are growing
are C&I and CRE, which have been highly competitive areas. I do
expect improvement in credit performance, though which should
result in solid operating performance in the Q. So, Net Interest
Margin (NIM) pressures are easing, but I expect banks to realize
this benefit on a lagged basis if at all.
4. The most important story of 2014 will be the implementation of
ACA, which restructures 20% of the US economy. This is a massive
undertaking and there will be problems with implementation, but the
systems are to be rolled out by October, so expect more focus on
this as we get closer. There are questions about whether it will
get implemented, but I think it will. My early take on the path is
that early adopters will be the sickest, and temporarily increase
utilization rates and increase the cost profile, before they fall
again in subsequent years. This sets up managed care to profit in
the out years. Major pharma benefits in the short term, with
generic and OTC drugs becoming more important as we shift more of
the cost burden to the patients over time. Corporations should be
the biggest beneficiaries of ACA implementation, as it reduces
their costs. They will either dump workers on the exchanges and
take the tax hit, or self-insure to get around the tax penalty.
Self-insurance will drive the system toward more of a preventative
model, than a fee-for-service model
Micron Offers Bulls an Entry Point
) shares in their portfolio are likely doing a double take as
shares declined nearly 7% in trading yesterday afternoon, closing
nearly 10% off of recent highs. News that Micron CFO Ronald C.
Foster had locked in gains on the combined stock and option
equivalent of nearly half a million shares since June 3 likely
contributed to the weakness.
The 50 Day Moving Average currently sits around the $12 handle
which is also where the stock broke out from a long basing pattern.
Between $11 - $12, plenty of support resides that should hold if in
fact MU is to trade higher again in short order. I'm comfortable
entering long at $12 with a stop just below $11, and will likely
dollar-cost-average down should I be given the opportunity to do
so. From here, I'll look to hold shares long until next resistance
is reached above the $17 handle, which is more than 40% higher from
current levels. I'll look to remove my cost basis and roughly half
of gains here, with a final target north of $21/share. As for time
frame, year-end seems appropriate for both targets to be reached.
Good luck out there!
FOMC Minutes Swan Dive
Not much to offer here that hasn't already been said by officials,
in Bernanke's press conference, or that we've covered here. A few
-They seem more worried about volatility and whether or not
institutions can adjust to rising interest rates (given what we
know about their balance sheet composition). Additionally, members
saw the extended period of low interest rates may encourage
investors to take excessive credit or interest rate risk, but the
recent rise in rates may have reduced that incentive.
-The cost/effect analysis of asset purchases by the FOMC's staff
was seen to not have an adverse effect on financial market
-Increased worries over the downside risks to inflation, which are
viewed as transitory due to a one-time reduction in Medicare costs.
-Financial stability has increased over the inter-meeting period,
but broad based financial stress averages remain below average.
The one scary thing is that they've now clearly spelled out that
they don't know what to do in the most transparent fashion
possible. The response to further volatility was to expand on the
number of economic variables, the wrong thing to do; more
transparency is the last thing we need. When I remarked this to
Todd, he agreed that it would be very scary when the market woke up
to the fact that the Fed doesn't know what to do anymore.
I did find it funny reading about the FOMC's judgment regarding
which inflation measure to use going forward, whether or not they
should focus on core prices, without food & energy, or so on.
It reminded me of a Buzz I read of my Dad's from a long time ago,
about whether or not the core prices or core prices plus food &
energy costs (the headline CPI number) was the best measure of
inflation. Hopefully it's worth a laugh:
"I don't know about you, but I ate breakfast before heading to
the gas station this morning. Then I had some coffee and turned on
my lights and computer systems. And I intend on driving home today,
having lunch AND dinner before turning on my lights as it gets
dark. Then I will likely turn on the TV and watch the NLCS. All
before doing it again tomorrow."
Thursday, July 11
Bernanke's Mea Culpa
Stocks at the open have "surged" as Bernanke released more doves
than Prince at a concert (as a Twitter follower of mine likes to
(NYSEARCA:EEM) are ripping, bonds are recovering, and all is well
because more stimulus will be in place. Intellectually, this is
illogical. Bernanke effectively said that deflationary pressures
remain high, which warrants more money printing. The stock market
seems to like the fact that the Fed has admitted it has not done
enough, or rather that it continues to fight an uphill battle
towards reaching their inflation goals. So while stimulus may
continue to be in place, optimism about the economy seems very much
disconnected from the stock market's current levels, at least here
in the US. Our ATAC models used for managing our mutual fund and
separate accounts have not participated in the rip higher over the
past two weeks in stocks which came seemingly out of nowhere, but a
rotation by end of week is always possible. Emerging markets
remains a key area to watch for a major mean reversion trade, which
may be coming shortly.
Apple Acts Well Despite Negative News
) has climbed to a new recovery high today, and is attempting to
squeeze through a week-long resistance plateau at 424-425.
If successful, this should trigger upside continuation towards a
test of the May-July resistance line, now at 443.
At this juncture, only a break below 420 will compromise the
still-developing bullish pattern.
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The China Syndrome
We've heard a lot recently about China and how its slowing economy
is going to pull the rest of the world back into a recession (see
chart). I don't believe it! First, China's authorities are cracking
down on illegal invoicing, which makes the trade figures look
weaker than they actually are. Second, there are rumors swirling
the PBOC is going to take some stimulative actions in an attempt to
strengthen China's economy.
Moreover, as I stated on TV this week, I don't believe most of the
economic numbers coming out of China. Indeed, "I have seen the
truth and I don't believe it!" To be specific, China's survey
procedures do not keep up with the surging services sector and the
household survey doesn't capture the upper-scale household figures.
Further, according to the astute GaveKal organization, "Aggregate
consumption statistics are inconsistent with the retail sales
figures and company reports." So NO, I don't think we are into "The
As I concluded in yesterday's Morning Tack, "Of course today, it's
all about the release of last month's FOMC minutes, where pundits
will parse the Fed's every word in a monthly ritual that is
becoming absurd." And yesterday, it was indeed all about the FOMC
minutes as the stock market stumbled into the mid-afternoon FOMC
release, and then attempted to stage a rally. The rally was based
on the fact that nothing new, or interesting, was in the June 18-19
FOMC meeting minutes.
As our economist writes, "Fed officials are divided on the need to
taper the pace of asset purchases. The majority does not seem
intent on reducing the pace right away, and some want to see
greater improvement in jobs and in the economic growth outlook."
However, I have learned over the years that the first "move" by the
stock market following any Fed release tends to be a false move,
and that was the case yesterday, as the
(SPX/1652.62) rally attempt failed. The result left the SPX hugging
the "flat line" into the close. As stated, Wednesday/Thursday of
this week do not have much of a positive energy reading, but Friday
does. To be sure, Wednesday's rally attempt struggled below the
June 18 reaction high (~1654, as forecast) with modest selling
occurring. To wit, Downside Volume was only 55% of total NYSE
Up/Down Volume. This morning, however, it looks like Friday has
arrived early with the pre-opening SPX futures up some 15 points on
the Fed's "cooled" taper-talk, Japan's comments about the economy
finally improving, no Greek tragedy anytime soon, etc. Accordingly,
I'm still looking for a "blue heat" upside double-top blow off next
Click to enlarge
Friday, July 12, 2013
Putting the Heavy Equity Inflows Into Perspective
You know, it's funny, on Wednesday, I said to "Zeke"
(friend/mentor/PM) -- "Even though volume's relatively light on
this move, today has a the feel of some NEW money being put to
work... I'm seeing some ETF monetizations, namely in the
(NYSEARCA:IWM), which typically can mean parking inflows." Well
last night, as Mischler's Rob Livio sent around, Lipper dropped a
"hot lava" bomb (which by now many of you have seen):
US stock funds gain approx $11.8B inflows in week ended Wed;
largest gain since January.
Let's put this into perspective. We know that in late June, there
was $70b + outflows from FI, $14+ b alone at PIMCO. We know that by
all accounts, despite bull/bear sentiment indicators, the average
American and Global Institution has been relatively underinvested
in US equities.
1. Remember the
Gallup poll in May
, which asked Americans the following question: "Do you,
personally, or jointly with a spouse, have any money invested in
the stock market right now - either and individual stock, a stock
mutual fund, or in a self-directed 401(k) or IRA?" The results
showed 52% responded yes, 47% responded no, and 1% had no opinion.
To put that result into context, it's the lowest reading since the
poll was first conducted in September 1998. Moreover, at the last
market peak, in 2007, 65% of respondents answered yes to having
2. Mischler's "
Smartest Man in Global Capital Markets
" has told us that Global banks have taken equity exposure this
year, from all-time historic lows near 40%, to currently 50+%, on
the way to historic norms of 60+%.
So, everyone has been talking of the great myth of the "great
rotation" from stocks to bonds, like one would talk about Charlie
Brown's "Great Pumpkin." I'm not a rocket scientist, but, it seems
to me that the retail investor, to this point, had not been pushing
Lastly, I would add, Dow Theorists like Acampora will now be
looking for the
(INDEXDJX:DJT) to confirm the new closing high (3rd this year) on
Dow Industrial Average
(INDEXDJX:.DJI) . The previous high close in the TRAN was 6549 on
5/17. The Secular Bull fans could soon again be dancing in the
Rolling the Dice With Boeing
) is getting wrecked on news of a fire on a 787 Dreamliner (which
has some history of technical problems with batteries) at Heathrow
Details are hard to come by. Nevertheless, I just threw caution to
the wind and picked up some $106 calls expiring today for a nickel
a piece. In the event this fire was not caused by a problem with
the batteries, the stock should snap back hard.
There's 100% downside risk on this trade, and this may be a real
long shot considering the time frame (less than 3.5 hours), but the
risk-reward is insane in the event the fire was not caused by a
fault with the plane.
So maybe there's only a 1/10 chance this trade pays off, but the
payoff could be upwards of 25/1 if we get news that the fire was
not caused by the plane itself.