Tuesday, July 2, 2013

Net Bullish Sentiment Drops Sharply

by Lance Roberts

The recent sell off in the markets during the month of June sent the "bulls-a-runnin" with investor sentiment dropping sharply as market prices fell and volatility increased.  However, the plunge in bullish psychology has come with only a mild decline in actual stock market prices as the Fed's liquidity interventions have kept a bid under the markets in recent weeks.  The two charts below are a combined index of weekly survey's of both individual and professional investors.

The first chart shows the "bullish/bearish ratio" which is simply the difference between the sum of the bulls divided by the sum of the bears.  When the index is above 2.0 the markets are generally very overbought and close to a correction. The recent peak at 2.5 was one of the highest levels on this index since 2005 so the subsequent correction was not much of a surprise.  A reading at 1.0, or below, is normally consistent with a greatly oversold market.  While the market has not reached historically oversold levels in terms of sentiment as of yet - it will likely not take too much more of a decline in asset prices, or a rise in volatility, to push investors further into the negative camp.

AAII-IINV-Bull-Bear-Ratio-070113

The second chart shows the data a little differently.  This is the "net bullish ratio" which is simply the number of bullish investors less the negative ones and compared to the S&P 500 index.  Currently, at 5.85, the net bullish ratio has declined to much lower levels of bullish sentiment after reaching a historically high level above 30.  As with the bull/bear ratio above it will likely not take much more of a decline in asset prices, or rise in volatility, to push the number of bullishly biased investors into negative territory.

AAII-NetBullRatio-070113

As a contrarian investor these  indicators suggest that a short term bottom to this recent could be close by.  While bullish and bearish sentiment can give us some short term clues about investor extremes it is important to note that at turning points this data can be somewhat deceiving.  During positive trending markets low bull/bear ratios, and net bearish indications, are typically short term bottoms in a rising trend creating opportune levels to increase equity exposure.  However, in negatively trending markets, such low bullish biases are typically setups for a rally that should be sold into.  During the middle of market trends these actions are somewhat easy to determine:  Bullish trends - buy dips; Bearish trends - sell rallies.  However, it is much more difficult to determine such actions at market inflection points when the market is changing trends.

Currently, it is far too early to tell if the current market action is a topping process or simply just a "rest stop" on its way to further highs.  While the Fed's ongoing liquidity actions certainly suggest higher highs to come; slower profit growth, China/Euro-zone weakness, upcoming fiscal debates and a potential exit from QE could lead to a change in trend ahead.

Regardless, the increasingly negative sentiment of both professional and individual investors does indicate that the markets have begun to reduce some of the overly optimistic sentiment in the market.   Where the next rally takes the markets will tell us much about whether we have seen the peak of this market as of yet - or not.

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‘Total Surveillance’ Officially Brushed Off In Germany

by AuthorWolf Richter

German Chancellor Angela Merkel and her coalition are likely to emerge victoriously from the elections on September 22 – unless a major debacle blows up the equation. So all debacles have been deferred until after the election. The Eurozone debt crisis, Greece or Cyprus, collapsing banks and bailouts, whatever might happen in Italy or Spain, ECB shenanigans – no debacle is allowed to occur until after the election. But just then, over the weekend, a major debacle did happen.

The Spiegel, the largest magazine in Germany, had been able to “see and analyze” some of the documents Edward Snowden had purloined from the NSA. And now the whole world knows that the US intelligence community treated Germany, along with the European Union, France, and other countries, like Cold-War opponents.

Even French President François Hollande tried to slam his fist on the table when he said too softly into the uproar ensuing to his right and left, “we demand that this stop immediately.”

Not Merkel. She’s working furiously on deferring this debacle until after the election. When President Obama was in Berlin, she echoed his words that the then revealed portions of the spy programs had prevented a classified number of terrorist attacks in undisclosed locations on German soil. These programs were necessary to defend Americans as well as Germans against terrorism. Alas, the new revelations show that terrorism is only part of it – that in fact, the NSA has targeted everyone and everything, including companies, bureaucrats, diplomats, and elected politicians.

The NSA collected data on about 500 million phone calls, emails, and text messages per month in Germany alone, the Spiegel reported (article behind paywall) – by far the most of any country on the continent. In France, it was a measly 60 million communications per month.

It confirmed what has long been suspected in Berlin: with White House approval, US intelligence agencies assiduously spy on Germans, German companies, and the German federal government all the way to the top. What’s new is the extent of it – and the possibility, as the Spiegel calls it, of “total surveillance.”

Most intelligence agencies in Western countries are not allowed to spy on their own citizens in their own countries without judicial procedures. That includes the NSA in the US, the Bundesnachrichtendienst (BND) in Germany, and the Government Communications Headquarters (GCHQ) in the UK. But the BND and the GCHQ can spy on US citizens, just like the NSA can spy on German and UK citizens. The logical next step?

The documents show that the agencies work together, that the BND and the GCHQ “assist” the NSA in the surveillance of the internet and telecommunications and that they share data – that is, the BND and the GCHQ might share data on US citizens with the NSA, and the NSA might share data with the BND and the GCHQ on citizens of their countries. Thus, the agencies can get around the limitations on spying on their own citizens. In this manner, all citizens anywhere could be under surveillance by any government, including their own, beyond any kind of effective control and oversight. Hence total surveillance.

While the Spiegel decided not to publish details of operations that could threaten the lives of NSA employees, it wasn’t shy about disclosing how the system worked. Turns out the NSA has bugged the offices of the EU diplomatic representation on K Street in Washington DC and infiltrated its internal computer network, according to a 2010 document. This gave the NSA access to emails, discussions, and internal documents. Total infiltration!

The EU Mission to the United Nations in New York was infiltrated in a similar manner. Documents also showed that the NSA had attacked the telephone system of a building in Brussels that housed the Council of Ministers and the European Council. Those attacks originated from the NSA’s section of the NATO headquarters in Brussels.

Another document explained that the NSA has formed alliances with 80 global companies that support the two missions – defending US networks and spying on other networks. They included telecommunication companies, manufactures of networking equipment, software companies, and security firms, all of them identified only by codename. Which could get a bit tricky for these companies. They assured their clients that their data was secure while simultaneously handing it over to the NSA.

Europeans were outraged. Particularly Germans. They didn’t like being called “targets,” as one of the documents had done, remembering all too well Obama’s and Merkel’s protestations in Berlin that the targets of all this spying were terrorists.

“Reminiscent of methods used by enemies during the Cold War,” is what Justice Minister Sabine Leutheusser-Schnarrenberger, member of Merkel’s junior coalition partner FDP, called it. She has been jumping up and down about the spying scandals ever since the Prism program was revealed.

“The spying has reached dimensions that I didn’t think were possible for a democratic country,” said Elmar Brok, member of Merkel’s CDU and chairman of the Foreign Affairs Committee in the European Parliament. The US, once the land of the free, was “suffering from a security syndrome,” he said. “George Orwell is nothing by comparison.”

“A democratic state that uses Stasi methods sacrifices all its credibility as a moral authority,” Markus Ferber, member of Merkel’s CDU and member of the European Parliament told the Welt.

German and European officials far and wide called the media to get their sound bites in. But Merkel, who started her political career in East Germany under these “Stasi methods” and who is phenomenally popular, remained silent. The consummate political animal has no time for outrage. She’s trying to figure out how to defer that entire debacle until after the election.

But the opposition is trying to drag it by its hair into the election campaign. Peer Steinbrück, the SPD’s chancellor candidate and Merkel’s main challenger, demanded that she start an investigation. SPD Chairman Sigmar Gabriel raised the suspicion that Merkel had known about it all along and had tolerated it – and demanded that she explain herself. Merkel brushed them off with silence.

Meanwhile, a mad scramble has erupted in EU offices around the world to scour buildings for bugs and networks for infestations. The German Foreign Service wants to bring its communication technologies up to date. The Interior Ministry is checking its internal networks. And Merkel’s spokesman had the harshest official words so far: “Monitoring of friends is unacceptable,” he said. “We are no longer in the Cold War.”

That was it, as far as Merkel was concerned. She’d sail right through it, unscathed. And in the German media, the debacle is already moving on to Russia, where Snowden has apparently asked for asylum.

Surveillance goes beyond the internet and communications. A technology that surreptitiously captures data of people out on the street, combines it with other data, and mines it ad infinitum? In the US, local and federal government agencies love it. It’s increasingly sophisticated and cheap. It’s spreading. And it led a professor at the US Military Academy at West Point to warn: “We don’t have a police state in this country, but we have the technology.” Read…. Perfecting The Surveillance Society: If You Drive, You Get Tracked.

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Crude trades near one-week high as stockpiles seen falling

By Ben Sharples

West Texas Intermediate traded near the highest level in more than a week on speculation U.S. crude stockpiles shrank for the first time in a month, signaling increased demand in the world’s largest oil consumer.

Futures were little changed in New York after rising 1.5 percent yesterday amid signs of U.S. economic growth and concern that unrest in Egypt may spread and disrupt Middle East oil supplies. Crude inventories probably fell by 2.63 million barrels last week, a Bloomberg News survey showed before a government report tomorrow. The American Petroleum Institute is scheduled to release separate supply data today.

“It does seem to be a demand-side response from the market,” said Michael McCarthy, a chief market strategist at CMC Markets in Sydney who predicts traders may sell WTI contracts at about $98.50 a barrel. “We’re on alert for a shift to the downside move but given that this is demand-driven and there is potential for supply disruption it’s not impossible this time to see oil go through the top of the range.”

WTI for August delivery was at $97.89 a barrel, down 10 cents, in electronic trading on the New York Mercantile Exchange at 11:55 a.m. Sydney time. The volume of all futures traded was 57 percent below the 100-day average. The contract climbed $1.43 to $97.99 yesterday, the highest close since June 19.

Brent for August settlement declined 2 cents to $102.98 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade was at a premium of $5.09 to WTI. The spread was $5.01 yesterday, the narrowest based on closing prices since Jan. 4, 2011. It slid below $5 in intraday trading.

Goldman Bet

Goldman Sachs Group Inc. has forecast since February 2012 that the spread would shrink. The bank reiterated in May this year that it would narrow to $5 in the third quarter as new pipeline capacity to move oil out of Cushing expands. The oil- storage hub in Oklahoma is the delivery point for WTI contracts traded in New York.

U.S. gasoline stockpiles probably rose by 600,000 barrels in the week ended June 28, according to the median estimate of 10 analysts surveyed by Bloomberg before tomorrow’s data from the Energy Information Administration. Distillate inventories, including heating oiland diesel, increased by 1 million barrels, the survey shows.

The industry-funded API in Washington collects supply information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the EIA, the Energy Department’s statistical arm, for its weekly survey.

Manufacturing Expansion

U.S. factory output rebounded in June as orders picked up. The Institute for Supply Management’s manufacturing index climbed to a three-month high of 50.9 in June from 49 in May, the Tempe, Arizona-based group said yesterday. A reading of 50 is the dividing line between expansion and contraction.

The U.S. accounted for 21 percent of global oil demand last year, according to BP Plc’s Statistical Review of World Energy.

Egypt’s army yesterday gave President Mohamed Mursi 48 hours to respond to the demands of protesters and end a political impasse. The armed forces said the deadline was a “last chance” for everyone and that it would impose its own plans for the future if demands weren’t met. Hours later, it downplayed talk of a military coup, saying it only wants to push for a quick resolution to the current crisis.

Brent’s advance may stall because of technical resistance, according to data compiled by Bloomberg. Futures have traded higher than the 50-day moving average the past three days without settling above it. This indicator is at about $103.25 a barrel today. Investors typically sell contracts when prices fail to breach chart-resistance levels.

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One reason for recent Brent-WTI spread narrowing originated outside the US

by SoberLook

For the first time in some 2.5 years Brent-WTI spread (discussed here) has traded around $5/barrel. The two types of crude oil represent nearly the same product but have been trading at a wide spread due to difficulties of transporting sufficient amounts of North American crude from Cushing Oklahoma, where WTI is settled, to the Gulf of Mexico where it could be delivered to major US refineries or shipped elsewhere as a replacement for the more expensive Brent crude. These delivery challenges have been significantly reduced in the past couple of years. At the same time some technical issues in the North Sea have been resolved to stabilize Brent pricing.

Bloomberg: - The drop in the gap between Brent, a gauge for more than half the world’s oil, and WTI shows how improved pipeline networks and the use of rail links have helped to unlock a glut at America’s oil-storage hub at Cushing, Oklahoma, in line with a prediction made by Goldman Sachs Group Inc. as long ago as February 2012. WTI rose 5.2 percent in the first half of this year. Brent dropped by 8.1 percent as North Sea supplies have stabilized following oilfield maintenance.
“The spread is coming in on anticipation that we’re going to see pipelines get built and more rail capacity put in place,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “There is now a likelihood that not only will U.S. imports drop further, but that the country will be exporting before long.”
But there is one question that still remains unanswered. A major portion of the spread compression to $5 has taken place just in the past few weeks. Moreover, the volatility of the spread has fallen dramatically.

It is highly unlikely that the market just came to a realization in mid-June that "improved pipeline networks and the use of rail links have helped to unlock a glut at America’s oil-storage hub at Cushing". The transport dynamics in the US have been improving for some time - so why should the spread collapse now?
Something else happened in mid-June that started this steady decline. It was the Iranian elections.

CNN: - Iranian centrist candidate Hassan Rouhani won the Islamic republic's presidential election Saturday after campaigning on a "hope and prudence" platform in which he appealed to traditional conservatives and reform-minded voters alike.
Rouhani spoke of reforms without threatening Iran's supreme leader or its institutions, of which he is a product. The former national security council chief promised an environment with greater personal freedoms and even indicated he would free political prisoners and jailed journalists.

The outcome of this election greatly reduced the risk of a major conflict with Iran, thus lowering the "Iran premium" priced in Brent-WTI spread. This premium existed because a military clash with Iran would impact Brent (and similar regional blends) supply and pricing to a far greater extent than WTI. This change also opens the door for a potential lifting of the sanctions against Iran, making supply disruption risks even lower. Given Iran's nuclear work, the risks are clearly still there, but the market is perceiving them to be materially reduced.
While the transport fundamentals in the US have definitely driven the spread lower over the past year, it was the elections results in Iran that precipitated the rapid collapse in this widely watched spread.

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Another Stock Market Pop-n-drop?

By: Anthony_Cherniawski

The commercials are doing it again. You may have noticed that there is a pretty regular ramp in the Pre-Market, then the market goes quiet during the day. At 3:00 or 3:30 the selling begins, with a huge red volume spike into the close. This is a distribution pattern that has continued for over a month, with a few exceptions. Through this method, stocks are being distributed to weak (retail) hands.

The Pre-Market shows a 6-7 point spike higher this morning, challenging the Lip of the Cup with Handle formation near 1614.00. Chances are good that the spike may stop there, but it could progress back to the declining hourly mid-Cycle resistance at 1618.28. In either event, I expect to see the decline resume today, possibly with some catalyst to break the 1560.33 low.

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U.S. 30 Year Treasury Bonds – A Rally To Sell?

By: Michael_Noonan

Trading opportunities arise every day, however, quality trades that offer an edge do not. We use developing market activity, as depicted in charts, to find trade potentials with a defined limited risk and greater reward potential. 30 Year Bonds appear to be advertising weakness and a shorting opportunity.

When seeking trades, we use the “If, Then,” approach. IF the market does this, THEN we do that. The latter is acted upon only if the former requirements are met. Following this scenario, there is no guesswork or predicting involved, and the emotional element is not in play, either. Discipline is required, but it leads to more profitable trading potentials, so it is worth the effort.

The first step is to put the market into a context, and that comes from assessing the higher, more controlling time frames. We start with the monthly..

The most important first step is to always identify the trend within the time frame under consideration. We look for synergy amongst all time frames to increase the odds of accomplishing a successful trade. From the clustering of closes top formation, a low was established in March, 4th bar from right, a lower swing high two bars later, in May, and another lower low, at the end of June. This is the simplest definition of a downtrend.

Chart comments explain the weakened structure for Bonds since the high. June, the last bar, retested support from 2011 and 2012 lows. The weekly is used to refine the bars.

The weekly shows more of a trading range, and the second to last week was a strong move down with a poor close, the market telling us sellers are in charge. But were they? Price declined into support, and leaving the channel put price into an oversold condition. As a consequence, there was no further downside follow-through, as the last weekly bar shows.

The last bar gives added confirmation that support is likely to hold, at least initially. Why? Note how small the range was and the position of the close. The smaller range tells us that buyers were present, not only preventing sellers from extending the market lower, but the high-end close lets us know buyers overwhelmed sellers’ efforts. That is important to know. If short, it would be a good reason to cover and stand aside. This is how to use the information from the market as the best and most reliable guide.

With the trend down, within a larger trading range, it becomes a personal choice of one’s trading skill[s] whether to trade from the long side at this support. We choose not to, and instead look for a weak rally to sell.

The last five bars on the daily comprise the last small bar from the weekly. While it looked like buyers were stopping sellers, it was more in the form of short-covering, after such a large drop in the weeks preceding. Short-covering is not the same as net new buying. In fact, the last five bars are relatively weak in an ability to rally higher, and that is what can be expected in a downtrend.

A rally against a wide-range down bar can meet resistance anywhere along the bar, from the low up to the high. The down arrow shows the high. However, bonds may run into resistance at where the mid-June swing low support was broken by that wide range bar. The dashed horizontal line from that swing low becomes future potential resistance.

What to look for, right now, is a weak rally. Small ranges up and less volume, relative to larger ranges down on stronger volume constitutes a weak rally, and they typically fail at an area of identified resistance.

If, then.

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