Thursday, January 29, 2015

The New Drivers of Europe's Geopolitics

This is an erudite piece from Stratfor on geoeconomic and political issues running through the failing disparate cultural/political/economic union experiment called the euro.

The New Drivers of Europe's Geopolitics

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By George Friedman
For the past two weeks, I have focused on the growing fragmentation of Europe. Two weeks ago, the murders in Paris prompted me to write about the fault line between Europe and the Islamic world. Last week, I wrote about the nationalism that is rising in individual European countries after the European Central Bank was forced to allow national banks to participate in quantitative easing so European nations wouldn't be forced to bear the debt of other nations. I am focusing on fragmentation partly because it is happening before our eyes, partly because Stratfor has been forecasting this for a long time and partly because my new book on the fragmentation of Europe — Flashpoints: The Emerging Crisis in Europe — is being released today.
This is the week to speak of the political and social fragmentation within European nations and its impact on Europe as a whole. The coalition of the Radical Left party, known as Syriza, has scored a major victory in Greece. Now the party is forming a ruling coalition and overwhelming the traditional mainstream parties. It is drawing along other left-wing and right-wing parties that are united only in their resistance to the EU's insistence that austerity is the solution to the ongoing economic crisis that began in 2008.

Two Versions of the Same Tale

The story is well known. The financial crisis of 2008, which began as a mortgage default issue in the United States, created a sovereign debt crisis in Europe. Some European countries were unable to make payment on bonds, and this threatened the European banking system. There had to be some sort of state intervention, but there was a fundamental disagreement about what problem had to be solved. Broadly speaking, there were two narratives.
The German version, and the one that became the conventional view in Europe, is that the sovereign debt crisis is the result of irresponsible social policies in Greece, the country with the greatest debt problem. These troublesome policies included early retirement for government workers, excessive unemployment benefits and so on. Politicians had bought votes by squandering resources on social programs the country couldn't afford, did not rigorously collect taxes and failed to promote hard work and industriousness. Therefore, the crisis that was threatening the banking system was rooted in the irresponsibility of the debtors.
Another version, hardly heard in the early days but far more credible today, is that the crisis is the result of Germany's irresponsibility. Germany, the fourth-largest economy in the world, exports the equivalent of about 50 percent of its gross domestic product because German consumers cannot support its oversized industrial output. The result is that Germany survives on an export surge. For Germany, the European Union — with its free-trade zone, the euro and regulations in Brussels — is a means for maintaining exports. The loans German banks made to countries such as Greece after 2009 were designed to maintain demand for its exports. The Germans knew the debts could not be repaid, but they wanted to kick the can down the road and avoid dealing with the fact that their export addiction could not be maintained.
If you accept the German narrative, then the policies that must be followed are the ones that would force Greece to clean up its act. That means continuing to impose austerity on the Greeks. If the Greek narrative is correct, than the problem is with Germany. To end the crisis, Germany would have to curb its appetite for exports and shift Europe's rules on trade, the valuation of the euro and regulation from Brussels while living within its means. This would mean reducing its exports to the free-trade zone that has an industry incapable of competing with Germany's.
The German narrative has been overwhelmingly accepted, and the Greek version has hardly been heard. I describe what happened when austerity was imposed in Flashpoints:
But the impact on Greece of government cuts was far greater than expected. Like many European countries, the Greeks ran many economic activities, including medicine and other essential services, through the state, making physicians and other health care professionals government employees. When cuts were made in public sector pay and employment, it deeply affected the professional and middle classes.
Over the course of several years, unemployment in Greece rose to over 25 percent. This was higher than unemployment in the United States during the Depression. Some said that Greece's black economy was making up the difference and things weren't that bad. That was true to some extent but not nearly as much as people thought, since the black economy was simply an extension of the rest of the economy, and business was bad everywhere. In fact the situation was worse than it appeared to be, since there were many government workers who were still employed but had had their wages cut drastically, many by as much as two-thirds.
The Greek story was repeated in Spain and, to a somewhat lesser extent, in Portugal, southern France and southern Italy. Mediterranean Europe had entered the European Union with the expectation that membership would raise its living standards to the level of northern Europe. The sovereign debt crisis hit them particularly hard because in the free trade zone, this region had found it difficult to develop its economies, as it would have normally. Therefore the first economic crisis devastated them.
Regardless of which version you believe to be true, there is one thing that is certain: Greece was put in an impossible position when it agreed to a debt repayment plan that its economy could not support. These plans plunged it into a depression it still has not recovered from — and the problems have spread to other parts of Europe.

Seeds of Discontent

There was a deep belief in the European Union and beyond that the nations adhering to Europe's rules would, in due course, recover. Europe's mainstream political parties supported the European Union and its policies, and they were elected and re-elected. There was a general feeling that economic dysfunction would pass. But it is 2015 now, the situation has not gotten better and there are growing movements in many countries that are opposed to continuing with austerity. The sense that Europe is shifting was visible in the European Central Bank's decision last week to ease austerity by increasing liquidity in the system. In my view, this is too little too late; although quantitative easing might work for a recession, Southern Europe is in a depression. This is not merely a word. It means that the infrastructure of businesses that are able to utilize the money has been smashed, and therefore, quantitative easing's impact on unemployment will be limited. It takes a generation to recover from a depression. Interestingly, the European Central Bank excluded Greece from the quantitative easing program, saying the country is far too exposed to debt to allow the risk of its central bank lending.
Virtually every European country has developed growing movements that oppose the European Union and its policies. Most of these are on the right of the political spectrum. This means that in addition to their economic grievances, they want to regain control of their borders to limit immigration. Opposition movements have also emerged from the left — Podemos in Spain, for instance, and of course, Syriza in Greece. The left has the same grievances as the right, save for the racial overtones. But what is important is this: Greece has been seen as the outlier, but it is in fact the leading edge of the European crisis. It was the first to face default, the first to impose austerity, the first to experience the brutal weight that resulted and now it is the first to elect a government that pledges to end austerity. Left or right, these parties are threatening Europe's traditional parties, which the middle and lower class see as being complicit with Germany in creating the austerity regime.
Syriza has moderated its position on the European Union, as parties are wont to moderate during an election. But its position is that it will negotiate a new program of Greek debt repayments to its European lenders, one that will relieve the burden on the Greeks. There is reason to believe that it might succeed. The Germans don't care if Greece pulls out of the euro. Germany is, however, terrified that the political movements that are afoot will end or inhibit Europe's free-trade zone. Right-wing parties' goal of limiting the cross-border movement of workers already represents an open demand for an end to the free-trade zone for labor. But Germany, the export addict, needs the free-trade zone badly.
This is one of the points that people miss. They are concerned that countries will withdraw from the euro. As Hungary showed when the forint's decline put its citizens in danger of defaulting on mortgages, a nation-state has the power to protect its citizens from debt if it wishes to do so. The Greeks, inside or outside the eurozone, can also exercise this power. In addition to being unable to repay their debt structurally, they cannot afford to repay it politically. The parties that supported austerity in Greece were crushed. The mainstream parties in other European countries saw what happened in Greece and are aware of the rising force of Euroskepticism in their own countries. The ability of these parties to comply with these burdens is dependent on the voters, and their political base is dissolving. Rational politicians are not dismissing Syriza as an outrider.
The issue then is not the euro. Instead, the first real issue is the effect of structured or unstructured defaults on the European banking system and how the European Central Bank, committed to not making Germany liable for the debts of other countries, will handle that. The second, and more important, issue is now the future of the free-trade zone. Having open borders seemed like a good idea during prosperous times, but the fear of Islamist terrorism and the fear of Italians competing with Bulgarians for scarce jobs make those open borders less and less likely to endure. And if nations can erect walls for people, then why not erect walls for goods to protect their own industries and jobs? In the long run, protectionism hurts the economy, but Europe is dealing with many people who don't have a long run, have fallen from the professional classes and now worry about how they will feed their families.
For Germany, which depends on free access to Europe's markets to help prop up its export-dependent economy, the loss of the euro would be the loss of a tool for managing trade within and outside the eurozone. But the rise of protectionism in Europe would be a calamity. The German economy would stagger without those exports.
From my point of view, the argument about austerity is over. The European Central Bank ended the austerity regime half-heartedly last week, and the Syriza victory sent an earthquake through Europe's political system, although the Eurocratic elite will dismiss it as an outlier. If Europe's defaults — structured or unstructured — surge as a result, the question of the euro becomes an interesting but non-critical issue. What will become the issue, and what is already becoming the issue, is free trade. That is the core of the European concept, and that is the next issue on the agenda as the German narrative loses credibility and the Greek narrative replaces it as the conventional wisdom.
It is not hard to imagine the disaster that would ensue if the United States were to export 50 percent of its GDP, and half of it went to Canada and Mexico. A free-trade zone in which the giant pivot is not a net importer can't work. And that is exactly the situation in Europe. Its pivot is Germany, but rather than serving as the engine of growth by being an importer, it became the world's fourth-largest national economy by exporting half its GDP. That can't possibly be sustainable.

Possible Seismic Changes Ahead

There are then three drivers in Europe now. One is the desire to control borders — nominally to control Islamist terrorists but truthfully to limit the movement of all labor, Muslims included. Second, there is the empowerment of the nation-states in Europe by the European Central Bank, which is making its quantitative easing program run through national banks, which may only buy their own nation's debt. Third, there is the political base, which is dissolving under Europe's feet.
The question about Europe now is not whether it can retain its current form, but how radically that form will change. And the most daunting question is whether Europe, unable to maintain its union, will see a return of nationalism and its possible consequences. As I put it in Flashpoints:
The most important question in the world is whether conflict and war have actually been banished or whether this is merely an interlude, a seductive illusion. Europe is the single most prosperous region in the world. Its collective GDP is greater than that of the United States. It touches Asia, the Middle East and Africa. Another series of wars would change not only Europe, but the entire world.
To even speak of war in Europe would have been preposterous a few years ago, and to many, it is preposterous today. But Ukraine is very much a part of Europe, as was Yugoslavia. Europeans' confidence that all this is behind them, the sense of European exceptionalism, may well be correct. But as Europe's institutions disintegrate, it is not too early to ask what comes next. History rarely provides the answer you expect — and certainly not the answer you hope for.
Editor's Note: The newest book by Stratfor chairman and founder George Friedman, Flashpoints: The Emerging Crisis in Europe, is being released today. It is now available.

Read more: The New Drivers of Europe's Geopolitics | Stratfor
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"The New Drivers of Europe's Geopolitics is republished with permission of Stratfor."


Thursday, January 22, 2015

Humor: Baby's Got Black Swan

This is well done. Enjoy. 

Orig here: https://www.youtube.com/watch?v=FlItMpGYQTo 

 

Baby Got Black (Swan)

January 21, 2015
By 
babygot(With apologies to Sir Mix-a-Lot)
I like… fat… tails and I cannot lie
You vol sellers can’t deny
When a hot trend breaks with a well-timed stop
and a great big black swan pop you get
Paid… P&L year gets made
‘Cause you noticed that trade was packed
Buncha mean reversion suckers got jacked
Oh baby I wanna get lumpy
Long gamma for when it gets bumpy
Central banks tried to haze me,
But those carry trades just don’t faze me!
Ooh, outlier distribution
You say you wanna fatten my curve?
Well tail me, tail me
‘Cause you ain’t that average SD
I see ‘em blowin’ up every time
To hell with those nickels and dimes
She’s a thin ice leveraged land mine
Got it goin’ like a massive unwind…
I’m tired of that Barron’s and Forbes
Sayin’ divvy yields are the thing
Take a macro trader and ask him that
Trade’s gotta pack much black
My portfo-li-o don’t-want-none unless it’s fat-tailed hon…
So fellas! (YEAH!) Fellas! (YEAH!)
Has your tail trade got the vol? (HELL YEAH!)
Then spike it (SPIKE IT!) spike it (SPIKE IT!)
Spike that healthy vol!
Baby Got Black (Swan)!



Friday, January 2, 2015

Bloomberg European Union Financial Conditions Index: Teetering on Long Term Support

It's still holding support. Looking quite top heavy. Lots of power in the length of this consolidation if it breaks support.


Tuesday, December 23, 2014

Libor/Europe: Well There's Your Problem....

Irresistible Force meet Immovable Object in the EU financial octagon: A Loose Club Med Draghi versus The Hard Money Bundesbank

I notice Libor moves sharply higher. Greece is, once again, moving into EU stress cross hairs. Russia remains a conflagration.

Draghi is getting blow-back on more QE.
As Mario Draghi prepares to push the European Central Bank into quantitative easing, he’s counting the cost of alienating its home nation.

With the ECB president signaling that he’ll override German-led concerns on government bond purchases if needed, his institution is under attack in the country whose DNA inspired it. The outrage reflects concern that the Frankfurt-based central bank, which is modeled on the Bundesbank, is taking risks that its forerunner would never tolerate.

The Libor chart shows stress building in the EU financial system.

The stress will exacerbate if the market believes the Draghi put is in question.



Saturday, December 13, 2014

Quote of the Day

Frederick Douglass:
Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or both. The limits of tyrants are prescribed by the endurance of those whom they oppress.

Sunday, November 30, 2014

Update: Alpha Trader, Growth Equity and Quantitative Asset Allocation

ProfitableTrading.com hired me to upgrade and run one of their portfolio management newsletters called Alpha Trader.

Alpha Trader uses  similar process-based methods to select, enter, and define risk across ten different US equity strategies.  These include:

  • International ADRs
  • Undervalued growth stocks
  • Blue Chips
  • Extreme Growth
  • Dividend Growth
  • High Yield
  • Small Caps
  • Defensive
  • Natural Resources
  • Stock Market Masters Portfolio (picks by Tudor Jones, Kyle Bass, David Tepper, etc filtered with Alpha Trader screens)
 
Alpha Trader uses a few key fundamental and technical metrics (greater than 70th percentile) to select outperforming stocks in up-trends.  

It is a longer term, trend following system. The biggest winner in the International portfolio, BITA, was held for a year. It generated a nearly 34% gain for the portfolio with its monster run from an entry at $20 to our exit at $70.

I am adding quantitative rigor to the selection, entry, and risk management process across the Alpha Trader platform. I provide bi-weekly technical market commentary, stock selection, and manage the ten strategies.

Here are performance figures for a few of the strategies:




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I will continue to update the tears sheets for my Big Growth Equity and Quantitative Asset Allocation programs on my website. Look for a major update on the Quant program by the end of December. I encourage those with interest in either system to contact me at Tom@ThomasVicianCMT.com.

Monday, November 10, 2014

Quant System Tearsheet


I used robust Trading Blox software to back test and develop an absolute return, quantitatively driven investment program. The independent variable for this quantitative system is minimizing drawdown to avoid large downdrafts like 2008 or the dot.com implosion of 2001-2003. It offers a smoother, more predictable return stream than buy and hold across equities, fixed income, forex, and commodity asset classes. The core system is tactically binary between long and cash. It uses mostly ETFs and is diversified across markets, geography, and capitalization. The program has initial capacity to $1 billion AUM.

The system uses simple, robust technical indicators - properly (under) optimized - to tactically time entry/exit of individual portfolio vehicles. The system uses fundamental factors for overall allocation between asset classes.  System research, improvement and testing is ongoing and a dedicated part of my portfolio management. Currently, I am in development on a systematic asset category allocation method for version two.

Clients can custom allocate depending on their needs, desires, and economic concerns. Any asset allocation portion or individual component is available as a stand-alone investment strategy. For more details, please contact me.



Friday, November 7, 2014

Taibbi: Ex-JP Morgan Lawyer With Smoking Gun on Mortgage Fraud Stymied by Holder Cover-Up

Taibbi: Ex-JP Morgan Lawyer With Smoking Gun on Mortgage Fraud Stymied by Holder Cover-Up

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Matt Taibbi has pulled the curtain back on an offensive and obvious bit of Obama administration bank cronyism that disappeared too quickly from public attention. Earlier this year, JP Morgan settlement negotiations over mortgage misconduct had broken down over price. When word got out that the Department of Justice had a criminal suit that it was ready to file, Jamie Dimon called the DoJ and went to Washington to negotiate a deal. Let us turn the mike over to Georgetown law professor Adam Levitin who wrote at the time:
I’m floored that Attorney General Eric Holder was willing to take a private meeting with JPMorgan Chase CEO Jaimie Dimon while the bank is under criminal investigation and negotiating an enormous civil (and possibly criminal) settlement. I can’t recall something like this meeting happening before. There’s not anything illegal about such a meeting, but the optics are really bad and underscore the privileged position of the too-big-to-fail banks…

Who else is able to call up the AG and just get a meeting like that when their firm is under criminal investigation? Do other citizens get talk things through mano-a-mano with the AG himself? That Dimon even thought to initiate direct contact with Holder suggests that he has no sense of his place in society–or perhaps that he in fact does. Bottom line is that Dimon (and JPM) shouldn’t get any more special treatment than any other citizen, but it sure looks like he did.
But the whole point was to get special treatment. The criminal case went on hold. The settlement was structured to avoid court approval. Taibbi does not mention that the Administration acted as if it had really gotten a great deal by getting what looked like a really big dollar amount, but that was achieved via sleight of hand. The total was goosed up via throwing in a boatload of other claims, the biggest of which was Fannie/Freddie putback claims that constituted $4 billion of the $9 billion in total cash value of the deal. Holder took credit for that, when in fact that suit was launched by the much-pilloried Ed DeMarco of the FHFA (Taibbi correctly points out that the $4 billion of “consumer relief” that brought the headline total to $13 billion was show for the rubes). And JP Morgan admitted to pretty much nothing.

We now learn from Taibbi’s story that a whistleblower, Alayne Fleischmann, a securities lawyer who’d been hired by JP Morgan to help supervise the review of mortgages that were sold into securitizations. Shortly after she joined, the bank brought in a new manager for “diligence” who was technically senior to her. He focused on getting product out the door, no matter how toxic it was, browbeat managers who rejected clearly misrepresented loans, and implemented a “no email” policy to cover up what he was up to.

The centerpiece of the story is a package of particularly noxious mortgages from an originator called Greepoint. Their age alone made them suspect: they were unsecuritized after seven plus months, which meant they’d either already defaulted or had been rejected by another securitizer. One sample had 40% had overstated incomes, and 33% had incomes that were simply not plausible given the supposed employment of the borrower.

Fleischmann jumped ranks and spoke to a JP Morgan managing director, Greg Boester, and told him that selling these loans into securities would amount to fraud. Fleischmann was ignored. Boester is now at JP Morgan, after doing a brief stint at Citadel.
And here is the smoking gun:
A few weeks later, in early 2007, she sent a long letter to another managing director, William Buell. In the letter, she warned Buell of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process.
Fleischmann assumed this letter, which Chase lawyers would later jokingly nickname “The Howler” after the screaming missive from the Harry Potter books, would be enough to force the bank to stop selling the bad loans. “It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing,” she says. “But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.”
As we learn, Fleischmann told her story to the SEC, which instead refused to hear anything about Greenpoint. The US Attorney’s office in the Eastern District of California, by contrast, built a case using her evidence, which eventually led to the successful Dimon end-run. Worse, the DoJ almost certainly released Fleischmann’s name to JP Morgan; within days of the Dimon phone call, the Wall Street Journal ran a story stating that the government had a major female witness. And the Morgan bank looks to have successfully blackballed her, as job possibilities suddenly vaporized.
Tabbi also details how JP Morgan lied to keep Fleischmann’s evidence out of private suits:
In October 2013, one of those investors – the Fort Worth Employees’ Retirement Fund – asked a federal judge to force Chase to grant access to a series of current and former employees, including Fleischmann, whose status as a key cooperator in the federal investigation had made headlines….

In response, Dorothy Spenner, an attorney representing Chase, told the court that Fleischmann was not a “relevant custodian.” In other words, she couldn’t testify to anything of importance. Federal Magistrate Judge James C. Francis IV took Chase’s lawyers at their word and rejected the Fort Worth retirees’ request for access to Fleischmann and her evidence.

Other investors bilked by Chase also tried to speak to Fleischmann. The Federal Home Loan Bank of Pittsburgh, which had sued Chase, asked the court to force Chase to turn over a copy of the draft civil complaint that was withheld after Holder’s scuttled press conference. The Pittsburgh litigants also specified that they wanted access to the name of the state’s cooperating witness: namely, Fleischmann.

In that case, the judge actually ordered Chase to turn over both the complaint and Fleischmann’s name. Chase stalled. Later in the fall, the judge ordered the bank to produce the information again; it stalled some more.

Then, in January 2014, Chase suddenly settled with the Pittsburgh bank out of court for an undisclosed amount. Months after being ordered to allow Fleischmann to talk, they once again paid a stiff price to keep her testimony out of the public eye.
This story alone show that the claim that Obama and Holder made, that there was bad conduct in the mortgage market, but it didn’t rise to the level of criminal activity, is almost certainly a lie. Pretty much anyone familiar with the subprime market knew that, but now we have evidence that the government had concrete, powerful evidence plus a credible witness and chose to let a powerful bank off. The fact that the bank continued to engage in fraud after getting two warnings to senior managers, one in writing, would seem to rise to the level of criminality.

And as reader MBS Guy points out, how can the Administration reconcile this “let’s enable a coverup, just make sure we get some decent optics” with its posture on Libor and foreign exchange abuses? Are we really supposed to believe that the bar the DoJ is using in those to establish intent is more stringent than having a written, detailed warning to executives that was ignored.

JP Morgan is the bank with far and away the worst rap sheet of any US financial firm. It’s a recidivist in mortgages and in other areas of the bank. In dealing with money-laundering at foreign banks, officials forced key executives out, including one of the very top officials at BNP Paribas. But that was at New York State superintendent of financial services Benjamin Lawsky’s insistence. You’ll see nothing so bloody minded out of the DoJ when left to its own devices.

But this story highlights another element familiar to NC regulars: how Dimon lies routinely to his shareholders and in official testimony. Dimon has repeatedly maintained that JP Morgan was smarter and cleaner in mortgages than its peers. In fact, the Morgan bank did indeed have less market share, but that was by virtue of being a late entrant and then only intermittently willing to pay market prices to hire seasoned staff. Taibbi’s account shows that its claims to virtue don’t stand up to scrutiny.

Keep in mind that the JP Morgan criminal case was never officially closed; Taibbi surmises, as we did at the time, that the Administration agreed informally not to take the prosecution any further. Given that Holder is already doing victory laps, it’s a safe bet that the well-warranted consternation that this article will stir up will not bring that lawsuit back to life.

Wednesday, October 22, 2014

Followthrough Day Triggers for SP, NASDAQ, and Russell

The SP 500, NASDAQ Composite and Russell 2K all staged very strong price moves much greater than 1% yesterday on increasing volume from the prior session. This qualifies as a follow through day buy signal for O'Neil based growth systems.


Followthrough days (FTD) are a measure of market trend strength. There has never been a major market rally without one, but not all follow though days precede strong rallies. You can see that some fail in the chart above. And when they do, swift moves lower typically occur. FTD shows buying strength and a bullish tailwind. They suggest an internal risk on atmosphere from an intermediate term time frame.

To that end, SP 500 sector moves shows risk-on:

Short term, the market is very overbought. The NYSE McClellan Oscillator measuring advances and declines has launched to an extreme level:

I suggest that yesterday's follow through day has higher odds, very short term, of a buying climax. Internally, the McClellan is at the level of prior areas of market stall.

From a longer term trend perspective, the SP 500 has made a lower low from August. This is half confirmation of a new longer term downtrend. The other half is a lower high. The lower low itself shows longer term trend weakness. The SP 500 still remains below resistance at its 50 day SMA and a broken trend line. On the following weekly chart, I note a bullish candle and areas of overhead resistance.





Seasonally, October is historically a terrible month for US stocks. The Panic of 1907, the 1929 crash, and Black Monday of October 1987 all occurred during October. But into November and December, seasonality turns decidedly bullish. The follow-through day may be the first and earliest sign of an into-Xmas rally.
 



So their is is alot going on. Longer term, there is a lower low in place on the SP 500 with overhead resistance at both the 50 day SMA and the nearly two year up trend line broken early this month. Yesterday's follow through day is bullish intermediate term, as was the sharp move above the 200 day moving average which now acts support for pullbacks. Short term, the market is very overbought shown on the NYSE McClellan.

Tactically,  I am looking to add long side risk in all time new high growth leadership. I am willing to add risk on pullbacks given the follow through session yesterday. Some names sporting large fundamentals and strong technicals include RGEN, HQY, GMCR, and PANW.

Thursday, October 16, 2014

Groping for an Initial Bottom

Quick post:

Yesterday's intraday selloff nadir was frothy and emotional on the downside. The rebound was fast and hard. This morning  in preopen we have a successful test of those lows. Here is an intraday chart for further observation:

TRIN showed a spike above 2.50 yesterday while tick had another intraday spike low below 1300 for the second in three days.  Note the deep collapse in the Bloomberg Financial Conditions Index. This current collapse most closely resembles - in slope - the one from 2011 when the SP 500 ultimately dropped 21.6% from March through June.
 

The VIX has rocketed to 25. Note that prior crisis selloffs reached 40-45. If we blow through yesterday's low, we may be on our way to visit those higher levels. It is not my base case at the moment.


I notice NTES acts bullishly in the face of the current selloff. It's on my watchlist only.

For now, I think the market has priced the initial "worst" of this round of the ebola scare and potential fear driven consumer spending slowdown. Twenty one days is the tail end of the ebola incubation period for further sicknesses. Looking forward, this is an important window for the market. 

I am decidedly flat position-wise, sidelined, and waiting for a follow through buying session to consider adding long side risk.

Wednesday, October 15, 2014

New Low for the SP 500 Future

October is a seasonally poor month for stocks and this one is no exception.  The Spoos broke their support lows this morning on more weakness overseas and as second nurse tests positive for Ebola in Dallas.

On that front, the CDC and Texas hospital have acted like the Keystone Cops regarding safety protocols while handling the Liberian patient that lied and died here in Texas:

In a conference call late Tuesday, the nation's largest nurses' union described how the patient, Duncan, was left in an open area of the emergency room for hours. National Nurses United, citing unnamed nurses, said staff treated Duncan for days without the correct protective gear, that hazardous waste was allowed to pile up to the ceiling and safety protocols constantly changed.

RoseAnn DeMoro, executive director of Nurses United, refused to say how many nurses made the statement about Texas Health Presbyterian Hospital, but insisted they were in a position to know what happened.
So there will likely be many more infected - viruses have exponential growth curves.  How many non-hospital people came into contact with the dead guy Duncan when he was left in the open? Doe they have fever? Ugh. Dallas is four hours up the road from us.

Ebola cares not for politics or incompetence. Unfortunately, both support the spread and we are up to our eyeballs with both from the Obama Administration (is the president on the back nine yet and under/over par today?), CDC, and sterilization procedures at the Texas hospital. 

Back to the market. The Spoo future left another long wick yesterday by the close showing strong selling pressure hammering buyers yet again as price was repelled and closed under the key 200 day SMA. What had been roughly a twenty five handle move higher has completely dissolved into a symmetrical 24 point move lower pre-open as I type. This is a powerful downtrend underway.

The market is very oversold and remains extremely weak. Odds have greatly increased for a fast capituation move lower. These occur from deeply oversold conditions where the market has repeated rallies that fail (leave long wicks). I provide perspective on trend support and an important measure of capitulation below.

Treasuries have a rock solid bid. So do defensive utilities while crude broke its long term uptrend I mentioned yesterday. Black gold/Texas tea has followed-through with another new low this morning. At best crude shows disinflation, at worst outright deflationary pressure. The BKX bank index teeters on its support trend line as well. I would expect a break of it this morning given pre-open equity weakness. If/when this happens, it is another bearish confirmatory break in the key financial sector.

Note the continued sharp move higher in the credit default swap (CDS) index. This confirms selling pressure seen in the equity averages.


While its ugliest at the bottom/darkest before the dawn during market selloffs, today's break below the reversal lows of the past two sessions deserves respect for what it has achieved given how wound up bearish sentiment has become (see yesterday's post).

I leave the reader with one last chart. Net new highs (or greatly expanding lows in this case) with a trendline and indicator target for the Wilshire 5000. Sharp expansion in new lows is a solid measure of capitulation. The chart below shows the broad market has moved through the extremes since 2012 and gives perspective on the next lower extreme from 2011.

Tuesday, October 14, 2014

Nearing Capitulation

By yesterday's close the SP 500 future blew through support at the 200 day SMA. If you inspect a candlestick chart of the SP 500 future, you will notice the last two days have left long upside wicks with closing  prices at the lows of the session, well below the prior low, and making new lows for the move down. The wicks show heavy supply hitting the demand bid and forcing price back down into new lows despite the market's oversoldness. Volume remains extremely heavy the past three sessions since the follow-through day failure on October 9th.

This morning's preopen shows a strong and sharp rally in the Spoo future. (The strongest and sharpest rallies occur during downtrending markets.) Yesterday's low is REALLY important to hold today. If price breaks yesterday's low after this sharp rally higher given the oversold condition I mention below, it shows an eye-opening amount of selling pressure and yet another long wick candle rally failure, the third in three days. The "third times the charm" rule enters the fray.


Note, the risk/reward on the short side is really, really stretched. The percent of SP 500 stocks with RSI less than 30 in the following chart. The standard deviation extreme is off the chart and nears three year spike level extremes.


A nice contrarian indicator is blogger sentiment compiled by Lazlo Birinyi. I've followed it for a number of years now. It is at a two year extreme on an absolute basis.



The bank index, although weak, still remains above a major trend line.


The Bloomberg Financial Conditions Index shows a very large pickup in credit stress which confirms the move down in equities, though conditions still remain positive above normal (zero is normal). It nears support at zero, the July 2013 low.



Oil sits on major trend line support (my expectation is it holds). Lower oil prices are a disinflation/deflationary barometer. This is a very large line in the sand.


Crude impacts the XOI oil index. The XOI index trends towards strong positive correlation to the SP 500. The XOI looks climactic in its selling and nears a major low - both near term bullish/supportive signs. This coincides with crude holding the long term trend line above.

 


My expectation is to see a major low within the next week given the aforementioned factors and how wound up sentiment has become. If price violates the major trend lines in the prior charts, it would add credence to the idea of a forced de-leveraging underway of larger magnitude (not my base case). Think highly levered funds caught out on this decline.

For example a 5x levered fund undergoes a 1% decline in asset price and gets hit with a 5% loss to their book. These players get forced to either meet margin calls from their prime brokers or sell aggressively  to avoid the margin calls. Ironically, they end up selling their winners where they have liquidity and hold their losers where their is no liquidity. This is the meaning of the phrase: "Sell what you can, not what you have to." This is when back office information for the major prime brokers pays handsomely for their prop trading departments.

Monday, October 13, 2014

SP 500 Future Finds 200 day SMA Support

Just a quick note this morning. The SP 500 future gapped down last night below the 200 day moving average and has since rallied back above and well into the green prior to the open. The 200 day and overnight low are both important technical "lines in the sand" for bulls.

The percent of SP 500 stocks with RSI below 30 is just above five standard deviations. The same is true for the NASDAQ NDX. These are highs of a few years.

This is obviously extreme. The market is severely oversold. Finding support for a bounce here at the 200 day is logical. If the market blows through the 200 day and overnight low, a strong bid best manifest or down again for another head dunk the market likely goes. This is not my expectation. Initial resistance lies at the 1920/30 level.

More charts later this week.


Thursday, October 9, 2014

Followthrough Nullification

That didnt take long.

Today's selling in the major market indices has wiped out yesterday's follow through day gains. This action nullifies the follow through buy signal that occurred yesterday.

This fast failure bodes bearish.