Tuesday, August 2, 2016

German Bund Safe Haven Trade Showing Elevated Risk of a Size Unwind

So I'm crunching numbers with my quant testing and portfolio management engine Trading Blox Builder II. Im testing a cool idea on a US Equity ETF program with TBlox doing a brute force number crunch. I've got an hour of time to kill and a thought pops in my head:

Italian banks are gasping for air.  Note the ascending cone price formation in the MSCI Italian index. This shows increasing volatility.

And its trend following kryptonite. Higher highs then lower lows. Yuk.


So how go German banks?

Nicht so gut.

Here's Deutsche Bank. Note the 13 year support trend line break.


(For more German banking detritus, you can see Commerzbank here.)

That's a whole lotta technical ugly goin' on from bellwether DB. Without being ZeroHistrionic, it's more-than-faintly Bear Stearns-ish. I remember it well. Lived right through that running our fund.

Could get a little bumpy for giddy US stocks.

I don't have BBerg access for quotes on German CoCo bonds, but they are quite the brilliant  shade of leading indicator canary yellow. They are a useful carbide lamp to illuminate this unfolding systemic stressor.

And finally we reach the title of this post in a scenic preambulatory thoroghfare.

The 2yr Bund stages a sharp rally:

Note the two prior sharp, fast bear rallies which immediately stalled.

The slope of this rally is still strong, but less sharp a short pop 'n drop move. Second, note the key resistance trend line. Break it and higher odds of an unwind is underway.

The issue is the ill's of Deutsche Bank and the cost to the German economy/Bundesbank to bail the financial Hindenberg.

Coupled this with the institutionalized, common sense, and conventional wisdom of the Bund safe haven trade. Which has been in play for a number of years now.

Its the EU's US Treasury. Kind of.

Until its not.

The ills of DB and Commerzbank coupled with the Bund's One Way, Flight-To-Quality trade

Quite the deadwood tinder pile.

And I smell smoke.

Thursday, July 28, 2016

Is High Beta Finally Ready to Outperform Low Beta?

The past year has been very difficult for momentum investors. There’s an old trading aphorism – “markets can scare you out or wear you out.” We’ve had the pleasure of both from June 2015 to the first part of July 2016.

And this had a profoundly negative impact on high relative strength stocks. High RS thrives in periods of low volatility. And it does quite poorly in markets like the buzz saw above.

Back in late May, Sentimentrader.com put out a great study. They took Fama/French volatility data and compared the highest decile beta to the lowest decile. They found over the past year high beta lost 30% while low beta gained 10%. That’s a 40% spread against high beta.

That is the definition of a gale force headwind. It’s also stealth bear market for high RS stocks.

And at the worst of the dual nadirs above, the S&P 500 declined just a third of that huge -40% spread.  Stealth indeed!

But times are changing.

First, we’ve just seen a 15 year extreme. For perspective: we’re already in the basement - not the roof and climbing the chimney.

Second, the relationship between high and low beta nears important inflection points.

The Fama/French data comes with a lag so let’s look at a couple of high/low beta SP500 ETF’s: SPLV (low) and SPHB (high).

The following chart has three panels. The top shows a closing line chart of the high vol ETF. The middle shows a closing line chart of low vol. The bottom panel is the ratio between the two: high/low (down means low beta outperforms).

Point 1: Notice the February low in high beta. Notice the current July low is higher. This is a negative divergence for low beta. Despite low beta making a price high in late June, the ratio between the two did not make a new low like February. This shows faltering low beta nonperformance. Momentum slows.

Point 2 shows the ratio bumping up against a key 14-month resistance trend line. It remains intact. Trend favors low beta.

But the ratio has touched it three times in six months after going a full year without hitting it. Momentum slows.
Point three and four show key support and resistance trend lines for the ETF’s themselves. Note high beta point 4 especially. It is a huge complex head and shoulders bottom covering two years of long term high beta under-performance.

When price breaks above that line, I expect a sharp move back into high beta. This bodes well for high relative strength momentum stocks.

So stick with the current trend favoring lo-vol. But note the lessening momentum behind the trend and the power built up behind the technical bottom pattern if/when it breaks. 

I’ll update as conditions warrant.  

Wednesday, July 13, 2016

Amazon Jeff Bezos Gloating Magazine Cover: Hubris Risk

I wrote about the importance of emotional magazine covers as societal abreaction events here. It was subsequently published by the Market Technicians Association in their monthly journal "Technically Speaking."

Yesterday, I saw this:


One of the great Slip 'n Slides of human existence.

This is an emotionally charged cover on a major tabloid. Big letters with the words Conquer and PRIME. Huge smile from Dr Evil. It's all there. We're only missing a .wav file of his proprietary laugh.

It reminds me of another cover back in 2013 - a cover from Time on Carl Icahn as "Master of the Universe."

No smile from Carl, though. He masked NYC dour arrogance instead.

I wrote about it when I saw it here and here.  Go take a look.

And the long term result?

IEP was in a parabolic blowoff pattern when the cover appeared.  It was closing on a 150% gain from its $40-$50 dollar two year (Mar 2010-Dec 2012) base. 

Archetypal cover.  

And now establishmentarian Bezos graces the Pillars of Pride:

The chart is different. No blowoff. 

The trend is up on the recent, low volume all-time new high breakout. Earnings come due July 28 aftermarket - about a week away. 

Tactically, I'd scale back my position risk anyway ahead of the binary earnings event.  With the cover, I'd probably take a little more off the top. 

A blowoff move catalyst for AMZN - like IEP - may be this report. A big gap higher on positive earnings I'd use as as a "gift" sell signal.  

Here is a trend following supportive sell tactic. 

Use a close below the 7 day exponential average to sell. Check the stock price through the last half hour for a break confirmation to sell same day. Or let price close below the 7 day ea and sell on the next day's open.

If the stock suffers a large gap down, the cover likely coincided with an abreactive top. Thus, my suggestion of reducing position size a bit more than usual ahead of the release.  

I'll update next week.  

Monday, July 11, 2016

Boom! All Time New High with Day 2 Follow-Through in the SPX

I wrote this educational article on the importance of the all time high, whipsaw and systematic trend following. I detailed in a real trade of DDD.

I provide the link above for my readers to reacquaint themselves with these importance concepts. 

The US equity markets last 18 months is filled with whipsaw. 

Right now, the S&P 500 has broken out of a long term consolidation to a new all time high despite the EU upheaval over Brexit, the Italian Banking System

This is what Bini Smaghi, the chairman of Societe Generale, said last week:
Italy’s banking crisis could spread to the rest of Europe, and rules limiting state aid to lenders should be reconsidered to prevent greater upheaval, Societe Generale SA Chairman Lorenzo Bini Smaghi said.
“The whole banking market is under pressure,” the former European Central Bank executive board member said in an interview with Bloomberg Television on Wednesday. “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”

and the woes of systemically important Deutsche Bank inextricably tied to those Italian banks through a web of counterparty derivatives contracts. 

The market smells and discounts a bailout. Heck, the heads of the EU banks are now rattling the cages to scare up euros. What a far cry from 2008 when no one painted anything but the rosiest of pictures while Rome burned. 

And the U.S market is the nicest house in a run down neighborhood.

Sometimes the hardest breakouts to buy is the first all time new high...

Tuesday, July 5, 2016

Anatomy of Winning Position

Anatomy of Winning Position

This report provides a review of a winning position. It highlights notable concepts from prior papers. The stock is an actual position from my all-time new high, semi-quantitative growth stock system.

It demonstrates classic trend following principles. Importantly, it offers readers/investors important examples of a model winner, whipsaw, and persistence executing a system..

They're not all this good. But these are the few trends I really want to capture.

The stock is 3D Systems or DDD.

The period runs May 14, 2013 to through January 13, 2014. The following is a brief synopsis of the trade from beginning to end. There are other system details that I intentionally avoid discussing. I give a general overview of the process and a semi-visceral feeling regarding the persistence it sometimes takes to catch a big winner.

So let's begin. 

Big growth stock winners tend to have certain characteristics in common. Based on technical and fundamental screening tools, I found the stock as it broke all time new high ground. 

The strongest breakout stocks move the quickest and never look back - by definition.

They give precious little time to buy them. Their "cheapest" price happens to be the highest price - their first all time new high. They keep going and never retrace back to the breakout.

Those who watch and wait for the pullback keep doing so.  For the entire move.

In order to catch these strongest trends,  you have to buy them right away. Later in this overview, DDD will demonstrate this key trend following characteristic. Buying the all time new high is difficult for most. For more information on it, I wrote a white paper here.

Buying the all-time new high frequently invariably results in some level of whipsaw (aka cutting losses) when price fails to rally further and begins to decline. For more about whipsaw, read my eponymous  white paper titled "Whipsaw."

The next chart of DDD shows a whipsaw as the stock declines after hitting its first all time high.

DDD happens to undergo a number of whipsaws prior to its big move.

While hindsight bias is 20/20, trading occurs in the now.  One surging, booming uptrend pays for all the whipsaw losses and balloons profitability.

Here is a chart showing four system whipsaws for DDD that occurred prior to its big up-trend. Failure to buy any of these all time new highs results in potentially missing a huge breakout trend. 

The stock finally began its big move the day of its earnings release after making its fifth and final whipsaw. Five whipsaws are emotionally untenable for nearly all traders to accept, stand their system ground, and keep pulling the buy trigger. Most traders move on and skip taking (yet again!) the fresh all time high breakout.

Here is the final breakout that started DDD's big move. Its archetypal for many big growth stock leaders. 

At the time of this breakout, I gave pre-open comments about DDD. I provide them below along with their corresponding charts. 

Elsewhere, DDD reported earnings this morning pre-open and collapsed down into the 52 handle before it mostly righted the ship. After this early deleterious action, an all time new high during the regular session would be quite bullish given the enormous whipsaw followed by a new high and strong close.
 On October 30th:

Technically, the action is fantastic. All the previous orange whipsaws show a huge amount of potential power. Longs have been battered and bruised given all the fake-outs. There are really favorable odds of an alternation to a smooth uptrend.
Generally, smooth moves lead to lots of directionless volatility and lots of directionless volatility eventually leads to a smooth move. I don't make the rules, I just notice and act on them as a trend follower.
 A conservative stop is under yesterday's emotional spike low. Another stop is a break of the support uptrend line I drew. A more aggressive stop is a retracement of 40 to 55% of yesterday's total price range.
For disclosure, I own the name.  The only drawback for the trade is the excessive market bullishness. Embrace both the stock and the market. Get in the strength and respect the growing market vulnerabilities. Do both at the same time.

The market decided to turn higher. DDD caught that huge tailwind.

Notice in the following charts the enormous strength of DDD's trend after those four whipsaws. Price never retraced back to the final breakout.

In order to catch huge moves like this consistently, you must be willing to accept whipsaws and re-buy each new valid signal.

On November 5th I offered this chart:

 On November 6th I suggested:

This final chart shows the entire move with an additional pyramid area.

The DDD trade provides a clear example of a real winning trade from my system. It shows important trend following principles at work:

  • The all time high or highest high ever as confirmation of a primary uptrend
  • Multiple loss cutting whipsaws and their potential emotional untenability
  • The importance of systematic trend following or keep on pulling that trigger.

Big moves like DDD end up paying for all the whipsaw losses and more.

In order to catch the big move, you have to be willing to keep pulling the trigger and by the all time high. You must have confidence in your system and yourself. Both manifest through commitment, hard work, experience, risk management, and faith.

 Big moves like this occur a few times every year over the intermediate term time constant of my system. Sometimes I catch the move just right.  Other times, like DDD, the market seems to ask "How badly do you really want to be in the big move  - if one even occurs?"

Badly enough to keep buying the all time new high.

For more information: www.ThomasVicianCMT.com

Tuesday, April 26, 2016

Will the Fed Pull a Bank of Japan?

There was an old buy side trader term called the Ax...who has it to grind that day.

It meant who had the biggest buy or sell order which determined intraday trading direction of any particular stock.

Across the Pacific, it would be the central Bank of Japan.

For everything.

What a slippery slope.

Why wouldn't the Fed do something similar if the market pressured it enough by trending lower? I mean its morally bankrupt but look at the time its bought Japan....

Wednesday, February 24, 2016

I Systemically Spy with My Little Eye ....

Scroll down for my partial systemic indicator risk list.

Im going to highlight some of the weakest.

Dollar yen and euro yen carry trades act bearish and continue their downtrends. This is a large currency headwind for stocks. Euroyen is weaker.

JGB's have once again gone into negative rate land. The 2yr German Bund failed to rally with equities and is close to making a new negative yield low.

Poor technical price action from EU banking weaklings: CS, RBS, DB, SAN, HSBC.

Back across the pond, ailing AIG can't even close above its 14 day exponential average with this latest market rally. That's profoundly weak.

Note the 2yr/10yr spread fails to rally with equities and makes a new low in its move down. The flattening spread shows a persistent belief on growing economic weakness. The first chart shows the huge support break, the second drills down showing the latest new low.

At Alpha Trader, my next piece of market analysis discusses the Return of the QE, and how it actually works. I dispell common myths. And there are a few whoppers.

Lastly, I discuss some of the strongest cash flow and relative strength stocks in the market now. Some we already own and a new issue sticking out like a green blade of grass in the desert. These are the next new market leaders when pressure releases from the broader market.

Saturday, February 20, 2016

Magazine Covers Coinciding with Major Market Turns

I wrote up a study on emotional magazine covers at important market turning points.

Enjoy a read.

This week Barron's and the Economist have covers out. Click to enlarge.


If you've read the link above, you'll note that neither of these covers make a declarative bearish statement. The Economist is wishy-washy. Barron's has a rough seas cover but their small print wording is bullish and complacent.

There is no "the sky is falling" in either of these.

So while we have two covers from financial rag-mags, they fail stand your ground bearishness of  covers which tend to coincide with major market turns.

Wednesday, February 17, 2016

Weakest Rallies of My Systemic Risk Watch List

Watchlist is here.

After this market rally, some things I notice:

Euro Yen, no rally and a humongous top in place. Note the support trend line from 2013. The EU yen carry trade. Lots of pressure on EU equity longs if/when that trend line falls. Size of the top projects for a large trend lower.

Credit Suisse; no rally;

AIG, no rally

Friday, February 12, 2016

The Fix is In - For a bit...

Why else would well connected banker Dimon buy a year's salary slug of shares?

The S&P reversed yesterday, testing its spike low and holding. Today is up. 

NASDAQ tested Jan Feb lows three times, now up. 

I'll be watching for what does rally and what fails to do so on my systemic list I posted yesterday.

Red bean BKLN - leveraged loan index - fails to rally today..so far.

The Dimon buy can work for a bit, but its NOT an all clear sign. There are too many global macro forces at play outside the US.

Thursday, February 11, 2016

I smell a whiff of deleveraging and forced selling

Extremely oversold on sentiment and market fails to rally and have any follow thru to the upside.

The selling keeps coming.

Yellen's speech yesterday.....behind curve. Got beat up politically. Suggests bigger fight for her to act, so market gives a bigger drop to get supportive political/monetary action because its not happening at current price levels.

How bout China. To bastardize a good spaghetti western, HANG SENG 'em High. Lots of leverage 'n lies getting scrubbed there.

PRU is ailing.....

JPM just broke important fifteen month support at 54.

SAN, Spanish bank, note long term chart.  Took out 2002 and 2009 and 2011-12 EU crisis lows. Shows clear systemic issues based on its price action, size, and name brand status.

Keep an eye on commodity trading firm Glencor across the pond. Big leverage. Along with DB - head of DB and Schauble out defending the stock yesterday. Parroting and squawking everything is fine. Reminds me of 2008. They're lying because their lips are moving.

Here is a portion of my systemic watch list I review for developing/intensifying problems - smoke, fire, etc.

Includes ETF/ETN providers. Lots 'o leverage in the system....switch a few letters to move from virtuous to vicious.



GLNCY  - Glencore


@DX - dollar index


Tuesday, February 9, 2016

Fed Easing "Tell"

Race to the currency bottom intensfies. Ease to buy China breathing room with its Yuan manipulation. 

Dollar headed lower. Easing ahead. Yellen speaks tomorrow, text released 830am EST.

Ready, set.....

Friday, January 22, 2016

Bounce Part Deux

So here we are again at bounce part two. US equities are severely oversold (duh) based on many measures including the McClellan Oscillator. So up we now go to relieve the pressure. Buy rumor, sell March news/implementation.

With EU QE drug pusher Mario "Super G" Draghi

From Jason G at Sentimentrader.com 
Another concern is that stocks have now suffered two 10% corrections in a short span. This is difficult to quantify, but according to our tests, this has only happened on three other unique dates, in 1929, 2000 and 2008. All of those preceded major bear markets.
The first and third were clear credit events. The second - while having credit related issues - was a bear market correction of clear, blowoff excesses in stocks.

The current selloff is credit related - souring bets and loans in oil related companies on less light sweet and more dour and sour crude prices. Banks are upping loan loss reserves and some, like WFC, likely are playing hinky games with portfolio valuations. Extend and pretend part deux as well.

Take a look at BKX. Looks like a significant new downtrend has taken hold

Notice the surge in credit default swap prices to the resistance trend line.

Chart courtesy of Sentimentrader.com. Get the service. It's excellent.

The quality and sustainability of the rebound is what generates new bull markets. I'm keeping my eye on the above to canaries in a coal mine. The BKX leads as do CDS's to an important but lesser extent because CDS can get diluted with speculative excess more-so than BKX.