Tag Archives: technicals

Rumors of dollar’s death greatly exaggerated

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Sentiment is still very anti-dollar (though not as extreme as last February-April), but the index is no lower than a few months ago, nor even a few years ago. Despite all of the dollar-crash and hyperinflation hysteria in recent years, early 2008 still marks the bottom.

MACD and RSI also seem to back up the case that the next big move is more likely up than down:

3 year daily chart:

stockcharts.com

5-year weekly chart:

bigcharts.com

10-year monthly:

futures.tradingcharts.com

The 10-year chart says it all: the dollar has already crashed, and as is typical in the financial markets, few noticed or attempted to take action until the move was already over.

Hussman: Market risk is extreme

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John Hussman is the rare mutual fund manager who uses technicals and hedging to minimize risk and maximize returns during a full bull-bear cycle. He hedged up in 2000 and 2007 to preserve his fund’s equity during the ensuing bear markets, and is again tightly-hedged in preparation for another downturn.

His weekly market comment is a must-read (if you just read this and Mish’s blog regularly, you’re all set). He uses a set of indicators to identify periods during which risk is elevated based on historical statistical analysis. They are: 1) stock market investor sentiment, 2) Case-Shiller PE ratio, 3) Treasury yield trends, and 4) price action (to indicate whether stocks are overbought or oversold using moving averages).

He concludes each market comment (in which he puts on his academic cap to discuss market statistics, Fed policy, etc in geeky detail), with a quick summary of where his funds are positioned according to the prevailing risk profile. When he starts his conclusion like this, you better not be long stocks:

Market Climate

As of last week, the Market Climate for equities was characterized by an unusually extreme profile of overvalued, overbought, overbullish, rising-yield conditions. Both Strategic Growth and Strategic International Equity remain tightly hedged here.

Here is a chart showing where these market conditions have existed in the past:

Looking for a temporary bottom

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World stock markets are oversold, and now that the US markets have taken a dip under the May 6 lows we have a stronger case for some near-term strength. The put:call ratio is also advising shorts not to press their luck, though there is still plenty of room on the upside, especially considering that this is indicator tends to oscillate from extreme lows to extreme highs:

Indexindicators.com

I’ve eased up on my short risk portfolio today by selling some puts, closing some ultralong ETF shorts, selling Yen and buying SPX and Nikkei futures. I’ll view any bounce as a shorting opportunity, since unlike most of the people on TV this week I don’t view this sell-off as a correction but the likely start of another leg down in a multi-year bear market.

I tend to be early on closing and easing up shorts, so take note that we don’t have much in the way of bullish action out there yet.

Double top in Gold, like July-March ’08?

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Very high sentiment readings last week, up to 20:1 bulls:bears. Quite a change from a few weeks ago, when traders were bearish by 4 or 5 to 1.

If the tide is turning back to the deflation trade, expect a rout in commodities like the second half of 2008. Yes, gold rose as stocks and other commodities fell last week, but it did the same thing when it first broke $1000 in early 2008 as stocks fell into the Bear Stearns crisis. The corellation with stocks could easily switch positive again as it did in ’08.

Russell 2000

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The Russell 2000 rocketed up this morning, just when it looked like it might roll over:

Prophet.net

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With no confirmation from the Dow and unimpressive short-term internals, plus a stubbornly strong dollar and bid on bonds, I’m not too concerned here.

S&P update

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Not a bad spot for a rally to stall:

Prophet.net

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Retracements have a tendency to move into the territory of previous rapid price changes, such as the drop from 1100 to 1080 several sessions ago.

Commodities and commodity currencies have had a great few days, and they have more than cleared their oversold conditions. The Euro even enjoyed a nice rally today, but it is moving closely with the S&P again.

Chart roundup

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Greetings from the USA. I’ve been on the move and under the weather (why is it I only get colds in the US?) for a couple of weeks.

Here’s an old standby, 20-day average equity Put:Call vs. S&P500. As you can see, extreme readings are a very powerful indicator, but the market can take its time in responding, as it is now:

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The action these days reminds me of May-July 2007, with its extreme optimism, complacency and overvaluation. Remember how quickly things cracked in late July and August, when we went from Goldilocks to Cramer’s famous (and probably scripted) tantrum about how Bernanke needed to lower rates?

Here’s another chart I’m watching. Would you sell it short?

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The VIX has printed a new low, but its slope is flattening out:

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One measure of risk is not registering new extremes, the Gold:Silver ratio:

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Here’s TLT (30 year bond proxy) priced in gold. I’m not saying it’s definitely printed a bottom, but I wouldn’t short this:

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I gather people are starting to fret about gasoline prices again. I’m not worried, since sentiment is getting pretty lopsided even as prices fail to register new highs:

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To filter out the reflation effect, here’s crude oil priced in gold. It has done all it needs to clear the oversold condition, with a kiss of 0.08, last seen in early 2007:

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Dr. Copper’s also all cleared for a fall:

As for the funnymentals, revenues and earnings are still way down from Q3 2008, which was already well into the recession. Quarter over quarter improvements in operating earnings mean nothing without revenue growth, and pricing power is shot. Analyst estimates assume a return to peak earnings within two years, which is insane, since the credit bubble that produced those numbers is not coming back. Credit of every kind is still shrinking. Bank credit just went negative for the first time since the Fed started keeping track in 1974:

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This remains a technical rally, a relief of universally bearish sentiment that has turned into a momentum-driven, low-volume, low-participation mini-mania. When the momentum runs out, there won’t be a bid to stop the fall for hundreds of S&P points.

We’ve been at peak conditions for about two months now, in terms of the VIX, put:call and sentiment surveys, and prices have fulfilled all kinds of technical targets. What can’t be sustained, won’t.

Watch out for the dollar

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UUP (dollar bull ETF) and SPY:

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Bonds were also up today, of course. Given the extreme degree of consensus we saw during the latest highs in stocks and lows in the dollar, today’s rally could be nothing more than a standard correction (at 40-odd percent, that is all the retracement is so far). It was to be expected (I went long SP futures and QLD Friday to hedge dollar longs and my equity and silver options). The test is whether we break to new highs on new reflation impulses. Precious metals, copper, oil, bonds and currencies say, “don’t press your luck.”

That should about do it.

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We haven’t seen this kind of bullishness on stocks since 2007. Pullbacks at every degree since the March lows have been shallow.  Volume and implied volatility have dwindled, and this month the put/call ratio has plunged while trader sentiment surveys have shot through the roof and levitated for three weeks. Tim Knight noted today that he had never seen the comment board on his blog so bullish, and those are hard-core bears. Dollar bearishness remains very high, while new lows have not been forthcoming. Treasury bonds are firm, having rallied off extremely low sentiment. China’s wave 2 bubble has apparently started to burst. Mortgage delinquencies and foreclosures are rising. The FDIC just became technically bankrupt. Bernanke is basking in his “success.”

Any further gains are going to be borrowed at steep interest, and we shouldn’t have to wait much longer for some fireworks.

Here’s the 5-day put/call vs. the S&P:

Indexindicators.com

Here’s the 20-day average and 3-year view: