Thursday, October 2, 2014

Crude, 5yr Breakeven Inflation Rate, and SP 500 Hang on Key Trendlines

Disinflationary overtones in the first two charts below:

Note the 5yr breakeven inflation rate (blue) in the next chart. Since June 24, it has collapsed and broken support at the 1.6% level. I plotted WTI Crude in red to show the general positive correlation by inspection.

That is a fast move down for inflation concerns. I wonder when the FOMC will blink, jawbone, and "release the doves." Since the SP 500 broke its 50 day SMA yesterday decisively, maybe later this morning? Or does it need to break this trend line first to garner jitters at the Fed?

Tuesday, September 30, 2014

Credit, Dollar Index, and Equity Net New Highs Update

In yesterday's post I mentioned a few things including the CDX credit default swap index and the dollar. The CDX index broke out to a two year high yesterday on continued strong upward momentum. This is an equity headwind as it shows credit stress rising - albeit from an absolute low level. But is headed in the wrong direction with momentum for equities.

This is also the case for the JNK junk ETF. It's attempting to bottom over the past two sessions both of which made new intraday lows for the move down.  Given the strong GDP number just released, it's more than interesting to see junk credit get taken to the woodshed anyways. It trades like something is amiss.  The ETF hasn't been the same since this article was released in June. I first mentioned it here.

The dollar index has boomed higher and broken huge four year technical resistance. Note the importance of this breakout in the weekly chart below. The length of time of the resistance is huge. The number of times its touched is huge (six). And the thirteen week run to it has been vertical (and huge.) Despite all this, price just sliced through what "what should have been" an obvious consolidation stopping point. It shows profound momentum - granted stops have been run this morning as shorts squeeze out and long trend players enter.

Nevertheless, strength in the dollar index negatively impacts multi-national US corporation's foreign earnings (the euro is worth less). Moreover, a ramping dollar has disinflationary overtones. Those overtones, I suggest, are being driven from across the pond with a profoundly weak euro and EU economy. Continued ramp in the dollar from here may have more to do with growing financial instability concerns as the driver  (economic and geopolitical concerns dovetailing) versus only economically driven interest rate differentials. EU driven problems blow back into US equities. While the tail may be wagging the dog, Fido ends up shaking nonetheless.

In US equityland, the total market net new highs chart continues to show expanding new lows and the 10 day SMA of net new highs sits right on critical support below zero.

I suggest that the foundation for equity rallies may be more prone to abortive characteristics given the aforementioned issues.

Monday, September 29, 2014

Signs of Initial Credit Stress

The Credit Default Swap (CDX) index has shown the first signs of a sustained uptick. It has broken through neckline resistance at the 350 level after stalling at that area over the past eighteen months (roughly).

It's absolute level remains low, which is a positive. If prices meander/stall here, this would relieve equity pressure. If the breakout has legs and the ramp continues with strong upward momentum,  this will be a risk-off issue for equityland.

Elsewhere, junk credit takes in on the chin with the JNK ETF making a new low for its large move down since late July. The BofA ML US High Yield Master II Option-Adjusted Spread shows stress.

Again, it is at an absolute low level which is a positive for stocks. However, if the rate of change higher continues at its present pace, the strength of the "risk-off" rally will pressure equities.

Last Thursday saw a very sharp down day with very high downside volume as the SP 500 broke and closed below its 50 day SMA. It triggered a Lowry's 90% down session (90% of net advancing/declining issues with their respective volume were down). These are pregnant technical moments. They can engender either washout lows sewing the sees of rally or intermediate term trend change. Friday saw a relief rally with the SP 500 closing above the 50 day.

This morning the Spoo future has once again broken the 50 day to the downside ahead of the open. There is near term (important) support at the intraday spike lows of last Thursday/Friday between 1956-1965. A new low and or close below the 50 day I view as bearishly tilted. There is a large support trendline at the 1940-45 area. It wouldn't surprise me if the market made has an appointment this week with the 1940 level. Everyone knows the McClellan Oscillator is extremely oversold and in "bargain hunting bounce land." But this morning's fast failure of Friday's rally, despite the oversoldness, tilts bearish. It shows continued, heavy supply at very oversold levels. 

Growth names showing relative strength include FB, LRCX, SWKS, and GPRO. GPRO is in the midst of a climax move. It has recently broken out from a bull flag pattern which targets the 95 level (possibly 100 due to the nearby round number.) Biotech names showing high relative strength include BDSI and CMRX.

Internationally, I direct your attention to the collapsing Russian ruble. It is a geopolitical and economic barometer. Last week, word out of Russia came that they were creating legislation to seize foreign assets in retaliation to US/EU sanctions. Quite an elegant economic, dictatorial strategy by Putin. Et tu EU? The MICEX index ETF RSX will be making a new low for its large move down today. Geopolitical instability is a bearish world equity headwind. EU equity bourses remain under heavy pressure.

I note the dollar index has stalled at its highs dating back to 2011 and just under the key 86 handle. The move to this level has had huge momentum. A strong breakout above this level, I suggest, will be clearly bearish for equities given the continued large rate of change it implies. A higher dollar negatively impacts foreign revenues for US large cap multi-nationals. And at a very strong, continued rate of change higher, a ramping dollar begins to have deflationary-like overtones.

Thursday, September 25, 2014

Thursday: Three Bearish Indicators Suggesting Higher Odds of Continued Selling

Note the selling in JNK. It's back at its beginning of August nadir. Junk debt is a blunt equity barometer. Now onto equity technicals:

Yesterday's rally off the 50 day SMA (roughly) in the Spoo future with the McClellan so deeply oversold "should have been" plenty to either sustain more rally or - at least - a consolidation of yesterday's gains. Instead, relentless selling causes the SP 500 to erase yesterday's gains and make a new low for this move down. Note the NYSE McClellan:

The second bearish indicator I present is the relentless pickup in net new lows:

Third,  note the collapse of the volatility based Bollinger Bands for the SP 500. Markets go from quiet and tight (low volatility) to periods of high volatility. This typically happens to extremes on sell-offs, but uptrends can show volatility pickups. The collapse of the bands suggest the current move down has higher odds of being violent in its absolute move lower and/or the trading ranges that develop.

Lastly, I notice growth stocks are really taking it on the chin today. High relative strength growth stocks letting go is a warning sign. To paraphrase a famous Livermore quote: When you can't make money from the leaders, you can't make money long the market. All growth is getting hit today.

Protect capital.

Thursday, September 11, 2014

Quantitative Asset Allocation Portfolio Management

My postings have been and will remain very infrequent due to my work on quantitative system development.

I am using robust Trading Blox software to develop an asset allocation program that offers a much better risk adjusted return than buy and hold across equities, fixed income, spot currencies, and commodity ETF's. The latter two provide diversification in certain forms of non-correlation. Some can act as surrogates for inflation exposure. Others have very positive trend characteristics that have little to do with US markets. The program has initial capacity to a half billion AUM.

The core system is tactically binary between long and cash. The enhanced system provides short exposure in very selected instruments for taxable accounts. For retirement/pension accounts, enhanced uses non-leveraged (non-volatility based) and very select inverse ETF's for exposure to intermediate term down trending markets.

The system uses simple and robust technical indicators to tactically time entry/exit of individual portfolio vehicles. The system uses fundamental factors for overall allocation between asset classes. When major fundamentals shift, allocation between asset classes shift with it. Additionally, clients can custom allocate depending on their needs, desires, and economic concerns. Any asset allocation portion or individual component is available a la carte.

The equity portion of the allocation is diversified across markets, geography, and capitalization.
It includes a portion devoted to my application of William O'Neil's US growth equity CANSLIM system. Additionally, it includes the Dow winning tactical switching study "An Intermarket Approach to Beta Rotation: The Strategy, Signal, and Power of Utilities."

However, I have improved on that great base system. That program is always long and takes the full brunt of 2008 and 2000-2003 style bear markets. For example, in 2008 the drawdown in the Vanguard Total Market Index neared 60%. The Utilities index was cut in half at its nadir. Both went down together. Ouch.

If you are going to run with that always invested system, you must be able to handle this level of draw-down when it comes. Which means: you must accept this upfront and always accept it while you participate in this system. Most intentionally forget about the risk and/or never accept that level of risk. Failing to accept this level of volatility, the investor will jump off the system into the maw of the draw-down and be too scared to rebuy. That's the psychology. I don't make these rules. However, I see them clearly and help others to follow them.

Personally, I want to avoid this level of drawdown in favor of a smoother ride. So to the MTA's Dow Award winning study, I have added a robust technical overlay to this switching system that is positive skew friendly and negative skew hostile. It adds much value and avoids major drawdowns with always long investing systems. These comprise the bulk of the "store-bought" methodologies available from Registered Investment Advisors. This is where I add large systematic value.

Stay tuned. More details coming.

Monday, September 8, 2014


The chart below shows the percent of NASDAQ NDX (leading index) with RSI greater than or equal to 70 as a measure of overboughtness I like to use. The market is entering a near term climax/froth zone if it moves higher from here.

Friday, August 29, 2014

Interview with Dr Philippa Malmgren regarding Precursor Inflation and the 70's

To paraphrase Wayne Gretzky: Skate to where the puck is heading....

Interview here

Dr. Philippa Malmgren is the President and Founder of Principalis Asset Management, based in London. Principalis engages in original research regarding risks to the market that are not easily quantified, namely politics, policy and geopolitics. Based on these insights, Principalis recommends specific investment strategies, trades and deals. Dr. Malmgren’s clients include many investment banks, fund managers and hedge funds as well as Sovereign Wealth Funds, pension funds, corporations and family offices.
She is a frequent guest on the BBC’s Today Program, Newsnight, a guest presenter on CNBC’s Squawk Box (UK and US) and is a speaker at many conferences across a wide range of industries. Dr. Malmgren has been a visiting lecturer at Tsinghua University in Beijing and an occasional lecturer for INSEAD and the Duke Fuqua Global Executive MBA Program.
She served as financial market advisor in the White House and on the National Economic Council from 2001-2002. Prior to that she founded Malmgren and Company, in London, England in 2000 and was previously the Deputy Head of Global Strategy at UBS and the Chief Currency Strategist for Bankers Trust. She headed the Global Investment Management business for Bankers Trust in Asia.
In 2000 The World Economic Forum named Dr. Malmgren a Global Leader for Tomorrow. She is a member of the Council on Foreign Relations, Chatham House, the Economic Club of New York and the Institute for International Strategic Security. She serves on the advisory board of Indiana University School of Public and Environmental Affairs. She is a Governor of the Ditchley Foundation in the UK.
She has a B.A. from Mount Vernon College and a M.Sc. and Ph.D. from the London School of Economics. She completed the Harvard Program on National Security and has a certificate from the 101st Airborne Division’s Air Assault School.

Thursday, August 28, 2014

Long End Treasury Surge and the Collapsing Ruble

Another quick note this morning as I spy with my eye a huge breakout above the spring stress highs in the dollar/ruble exchange rate (up is ruble weakness). The breakout is huge with the ruble tanking more than a percent overnight. The Russian Micex index has fallen 1.7%The Ukranian/Russian skiff has intensified and the US/EU sanctions continue to bite. The currency move shows real concern with the safe-haven dollar bid. Treasuries remain firmly bid at the longest end with the ZROZ strips ETF making a new high for its uptrend yesterday while the twenty plus duration TLT outperforms the still rising seven to ten year IEF ETF. China got clipped overnight between 1.5% and 2%.

Equities are overbought, have stalled over the last few sessions, and have rallied on very light volume in this move higher. Ahead of geopolitical risk over a long weekend, I expect some level of pressure into the remainder of the week. The trend remains up for the general market (sans the Russell 2000). The bid at the Treasury long end is eye-opening from a risk-off standpoint. Irresistible Treasury force meet immovable equity object. Who will blink first and when?

Wednesday, August 27, 2014

Declining Average Daily Volume in SPY

Note: I remain on vacation and low publishing until next week.

The McClellan Oscillator of advances and declines remains just shy of my first overbought level while the SP 500 has tagged the 2000 big round number. My expectation is for some form of pause as traders begin to square up into the end of the week and take some level of profits ahead of the long weekend.

Here is a nice graphic on the amount of specs in Crude along with their recent rate of change lower.

Here is an interesting study for your technical enjoyment:

If you click on the above chart, you'll see the rolling 50-day average of volume in SPY and the rolling 50-day average of daily trading range in SPY.  What is clear is that:  a) volume is closely correlated with index movement (the daily correlation over this period is .84); and b) volume and volatility have been crushed in the past several years.

The excellent Quantifiable Edges site points out that, since 2012, low volume on market strength has not been bearish.  Traders looking for volume confirmation of market strength have missed an important dynamic of this bull market.

Eldad Nahmany points out a very interesting study in which subjects found that having nothing to do was an aversive state--so aversive that they preferred painful activity to no activity.  The implications for trading in quiet environments are significant:  With little movement to stocks, traders needing movement might gravitate toward bad trades over no trades.  Such overtrading may not simply be a matter of poor discipline or lack of trading plans.  Rather, it would be the result of a failure to tolerate inactivity.  

As I've pointed out in other contexts, we are never alone and we are never without activity.  There are simply times when what we have is our own company and the activity of our own thoughts.  How well we tolerate our own company may be an important--and poorly appreciated--predictor of trading success...especially in quiet markets.

Friday, August 22, 2014

McClellan Oscillator Remains at 2014 Highs

Note: Postings will remain light through the Labor Day holiday.

Briefly, market advance/decline internals remain at their highest levels of 2014 ahead of Fed Chairwoman Yellen's speech today at Jackson Hole (buy rumor/sell news risk given the V-bottom rally in place).  I notice that despite the surging rally, Treasuries have held their aggressive ground gained at the long end. It's a really interesting development. If the equity rally shows a strong economy, why the continued bid in defensive long end Treasuries?

Credit default swaps have plunged back to their lows after hitting resistance at their 2014 highs while the VIX has collapsed. The CSFB Fear barometer is back into risk off ground as is the CBOE Skew index. The AAII Bull ratio once again shows excessive bullishness after this ramp higher to new highs by the major indices (sans the RU2K which is hitting a near term ceiling at its 50 day SMA.) I notice the banks, while still underperforming, have shown relative strength in the past few sessions, especially yesterday's huge thrusting surges in BAC, C, and JPM.

The market is at a binary event in my opinion. Given the rally, if profit taking attempts to move lower continue to find a strong bid, I think odds of a move much higher are favorable given current general momentum and the banking momentum seen yesterday. Otherwise, these current highs are at least a logical overbought pause and churn point.

New names on the leaders list include TRUE, GRUB, LEJU, and TRN.

Tuesday, August 19, 2014

NYSE McClellan at Second Highest Point of 2014

Been on vacation so lightened load these next two weeks. There has been a very weak follow-through day in the NASDAQ only on Aug 13. Short term the NYSE McClellan oscillator is at its second highest point of the year since February.  There is room for it to move even more extreme, but for perspective, it has entered nose bleeding territory.

Wednesday, August 13, 2014

Brief Update: Crosscurrents and a Bearing Up of Sentiment

Brief Update:
  • The market inflection from down to up between 8/7 and 8/8 was sharp and has held its ground. The SP 500 held and bounced from the multi-year trend line I mentioned last week. That is a major risk-on above, risk-off below line in the sand. Resistance lies at 1949/50 or the 50 day SMA along with the current down trend line from the highs.
  •  US equities have worked off their deeply oversold McClellan oscillator condition with the NYSE version at the zero midpoint. This is a natural, logical place for the market to show signs of stalling.
  • The current rally shows paltry new highs. More rally will throw a large negative divergence from the prior rally's net new high level unless new highs really pick-up. 
  • The Utility/VTI relative strength indicator switched to risk on last Friday. 
  • Sentiment has really come off its complacent highs. Indicators include CBOE Skew, put/call, CSFB Fear Barometer, and the AAII bull ratio. The Rydex ratio, while still excessively high, has accelerated lower. All this shows clear fear and a wall of worry entering the market. This is a welcome sign from the complacency that developed from May to late July.
  • Given sentiment, the long term SP 500 trend line I mention above "should" contain further declines. Strong support lies at the 1900-10 level. 
  • Europe, compared to the US, has been profoundly weak. I note that the dollar/ruble cross is near its Spring high and has ignored the lessening of tensions newsflow on the Russian/Ukranian row. Europe is attempting to stabilize technically from its severely oversold condition.
  • Junk fixed income has rallied sharply off its spike lows and back into obvious retracement levels: 50% and the 200 day SMA for JNK. The leveraged loan BKLN ETF shows very little rebound. JNK remains below long term trend line resistance from October 2011. It broke this trend line two weeks ago. This is large looming resistance.
  • The BKX bank index remains below its 200 day moving average. It needs to eclipse soon or risk grows for the current corrective down trend reemerging. Financials are a leading sector.  
  • The benchmark 10yr future remains well bid and holding its long term resistance trend line break (April/May 2013, May 2014) . This is a bearish overtone intermediate term. Lower yields at the long end suggest defensive asset allocation positioning.

So their are many crosscurrents at this juncture. The equity market has yet to produce a follow through day with one of the major averages up at least 1.2% on heavier volume. These precede all intermediate term rallies but not all follow-through days work. There is a signal to noise ratio. The lack of a follow-through day means heightened risk of further chop or a test to some level of the recent lows.

What is most striking to me is the lack of much down side follow through for the level of fear that has crept into the market. Ultimately, this is bullish as the market got very little bang for the downside buck. 

I suggest treading lightly with position size. Stocks acting well on my radar include: TRUE, GILD, BIDU, FB (above 74.20), TSLA, PBYI, SWKS, and PANW.

Friday, August 8, 2014

A Sketchy Market Remains Sketchy


  • I start with credit. Note the very large breakout above resistance in the benchmark 10 year Treasury future on the weekly log chart. This is equity bearish. 
  • Zeros continue to show strong upward momentum at the long end as well.
  • With the curve flattening, the BKX bank index continues to come under pressure with the leading index falling under its 200 day SMA. The index is acting convergently with lower equity prices.

  • The KRE regional bank ETF has a head and shoulders in play with the closing line chart right on the neckline. 

  •  This chart shows the SP 500/30yr T-bond spread beginning to revert from extreme SP 500 out-performance to a secular high. Note the broken trend line and double top.

  • This chart shows the positive correlation pickup between the BKX (leading) and the SP 500 along with important trend lines (one broken).

  • Both the US and EU Bloomberg Financial Conditions Indices are breaking lower and showing downside follow through towards more stressful conditions. This is convergent with the equity sell-off.

  •  The CDX (credit default swap) Index has broken out from important trend line resistance. I note the absolute level is low, but it rallies off a solid six month triple bottom.


  • The ruble continues to sink against the dollar as the crisis in Ukraine continues unabated. The rate nears its prior stress highs. Note the chart is inverted (up is dollar strength/ruble weakness).

Now on to equities
  • New lows have picked up dramatically and the 10 day SMA of net new highs is breaking key trend line support levels in the second chart. This is consistent with a period of high risk in equities.

  • Let's look at some measures of how oversold the market is. The two charts below show the NASDAQ NDX and SP 500 constituents with an RSI below 30 measured in standard deviations over the past three years. There is plenty of room to move higher. 

  •  The NASDAQ McClellan Oscillator looks vulnerable and has plenty of room to fall to prior large sell off lows of nearly the past five years. The same is true for the NYSE in the second chart.

  • Here are two line charts of the NDX and Russell 2K showing key support areas
  •  The SP 500 is right on very important long term trend line support from 2011 on the weekly log chart. Note the leading breakdown in RSI.


Long end Treasuries have been flashing warning signs of relative price strength over the past month. This remains the case as measures of credit stress like the Bloomberg indices above have broken down in earnest. The upside breakout in the 10 year Treasury's weekly chart is glaring. It took real bid work to do that. 

The SP 500 has touched and bounced off long term support. Yet while oversold, there is room for the market to move lower and reach prior levels of oversold extreme. While its obvious the market is oversold and a bid can emerge, I remain very defensive on the long side.

Wednesday, August 6, 2014

Credit Machinations and a Three Year SPX Support Trendline

  • Tuesday's new low in the SP 500 on increasing volume was an ominous fast failure and abortive from Monday's low volume rally. The SP 500 had tested last Thursday/Friday's lows a total of four times. This typically is enough to engender some additional form of rally. The market broke through the trend line connecting those lows and made a new low for its move down. This raises odds of more waterfall lower. Fast moves down accelerate from oversold conditions and rally failure. This is one way washouts occur.

  • The NYSE McClellan oscillator remains at my deep oversold level. The summation index has gone negative. The rally failure, coupled with an extremely oversold condition is what raises the odds of a waterfall, "puke" move down. 
  • Here is the SP 500 line in the waterfall sand - a three year weekly log chart support trend line:
  • Financials and banks are a leading index and the TBTF banks were notably weak yesterday. JPM is back under its 200 day SMA after a big earnings rally that has been completely erased. It is under pressure again this morning. The action is bearish intermediate term with the TBTF bank targeting support between $53/54.  The BKX bank index is on the first of two key support trend lines but has closed below its 200 day SMA on a closing line chart. Positive correlation heads towards one. 

  •  Across the pond, European bourses are getting creamed with Portugal and its banking crisis leading those bourses. The PSI-20 is making a sharp move down of nearly 4% for a new move low.
  • The dollar/Russian ruble cross continues to rally and nears its Spring high as tensions with Ukraine and the US/European economic clamps escalate. Irresistible US/EU force meet an immovable Putin object. The exchange rate is the barometer for capital flight and economic stress. The Russian Micex index has made a new low for its move down since late June and has broken a four month uptrend this morning since its March nadir. 
  • Treasuries remain firmly bid. Note the following yield/correlation chart with the SP 500. It shows correlation coiling at a low (negatively correlated) and now turning back up as yields break down with the SP 500 under pressure. The trade this suggests is Treasuries up/Yields down/Equities down. 
  •  The 2's/10's yield difference (subtraction) correlation is at a multi-decade non-correlation (20 day) extreme with both now starting to turn down (and revert). This flattening is equity bearish.

  •  Also note the extreme high in the SP 500/30yr T-Bond price spread. A corrective move lower has the Treasury long end outperforming and reverting. Note the broken trend line.

  •  On a closing line chart the LQD/TLH spread is on 2014 support for the fourth time.
  • The BKLN Leveraged Loan Index is at its lows from last summer and has broken a key support trend line from November 2012:
  •  The Bloomberg US Financial Conditions Index is making a new low for its move down from extreme complacency of a few weeks ago. The European version is close to a new low and shows roughly twice as much stress as the US, though both are in positive territory. 
  • The CDX index (credit default swaps) has bottomed, ramped and broken its downtrend from 2014 highs. It remains below those highs but confirms the stress pickup in credit shown in the leveraged loan and high yield junk space.
  • From the above credit indicators and banks, I suggest the move towards risk off appears to be stacking across instruments and spreads.
  • Five day net new highs went negative. This has bearish overtones.

  • Interestingly the IBD 50 Growth Index shows a very large relative strength breakout in out-performance to the SP 500. This is a nice change that - hopefully - sticks after this down trend in the major equity averages runs its course. It's been under-performing since January after a solid 2013.
  • I remain devoid of long exposure.