| Commentary: Two important buy signals bolster bullish case A month ago, I wrote that the upside breakout was confirmed. Since then, the breakout level (roughly 1,840 on the Standard & Poor’s 500 Index) was tested twice and held both times. Now the S&P 500 index /quotes/zigman/3870025/realtime SPX +0.10% has moved to new highs once again, both on an intraday and a closing basis (the Dow Jones Industrial Average /quotes/zigman/627449/realtime DJIA +0.11% is about to do the same). Those highs were confirmed by consecutive closes yesterday and today. Moreover, the overbought conditions that existed have been alleviated, for the most part, by the sideways action over the past month. Along the way, two important systematic buy signals have been registered, which bolsters the bullish case. Let’s begin with the chart of the S&P 500. The support at 1,840 is strong, but there should now also be support in the 1,870-1,880 range (an area which thwarted rallies all through the month of March) as a resistance-turned-support area. The first of the two buy signals marked on the chart is a VIX “spike peak” buy signal. That occurred on March 17, as SPX was rising from the first test of the 1,840 area. A VIX “spike peak” buy signal occurs when VIX spikes up during a period of fear (during a market selloff) and then spikes back down again. These occur a few times a year. The chart of VIX below shows the signals for the past year. The successful VIX “spike peak” buy signals are marked in red. Twice, there was a premature signal (marked in blue), preceding a successful signal. I have only marked the ones that satisfied all the parameters of the VIX system that we use for these buy signals. All of the major volatility indexes that we follow /quotes/zigman/2766221/realtime VIX +0.76% /quotes/zigman/2754753/realtime XX:VXO +3.84% (VXST) are trading at subdued levels. One might consider them to be “overbought” at their currently low levels, but in reality as long as VIX remains below 16, it isn’t a retardant to higher stock prices. Market breadth has been quite in sync with the market over the past couple of months. After registering a severe overbought condition in breadth in early April, the market backed off. The subsequent trading range environment alleviated those overbought conditions. Now, with SPX breaking out to new upside highs, breadth is beginning to get overbought again. But this time, we view that as a positive. When a new bullish phase begins in stocks, it is important to see the breadth indicators get overbought and stay overbought. That certifies the strength of the breakout. That is happening now. Officially, we measure breadth in two ways — one with NYSE stocks and the other with optionable stocks (i.e., those stocks which have listed options trading on them). Those two were divergent in late March, but now have converged, and that creates a buy signal. That is the other buy signal marked on the SPX chart above. It occurred at the close of trading on April 1. The construct of the VIX futures remains a bullish component, too. This is a longer-term measure which has been essentially bullish since the fall of 2012. It consists of two components: the futures premium on the VIX futures, and the term structure of the VIX futures. All of the VIX futures are trading with healthy premiums to VIX now, so that is bullish. Also, the term structure slopes upward (each futures contract is trading at a higher price than its immediate predecessor), and that is also bullish. Equity-only put-call ratios haven’t joined the bullish party (yet). We use 21-day moving averages on them, and they need time to roll over. For the record, they have been advancing for most of the past month. When put-call ratios are rising, that is bearish for stocks. When they peak, only then are buy signals generated for the broad stock market. That hasn't occurred. In summary, the market traded sideways for a month after it made new all-time highs a month ago. That allowed the market to build up strength, which it is now exhibiting with another upside breakout. I would expect a stronger move upward at this time before the next consolidation takes place. However, all bets would be off if SPX closed below 1,840, for that would be quite bearish. |
Thursday, April 3, 2014
Breakout suggests more upside ahead
Apocalypse Now? China 'bears' hope for their 'told you so' moment
By Vidya Ranganathan
| SINGAPORE (Reuters) - "It's like a horror movie. People like to watch, but don't want to be in it," quips economist Andy Xie about his popular lectures where he predicts a collapse in China's property and stock markets. The former Morgan Stanley economist is among the more moderate of the bearish voices that have called the 'China crash' since the late 1990s. The more extreme doom-mongers have been forecasting everything from a property meltdown and debt crisis to full-blown economic recession and even political revolution. Yet China has consistently defied the odds, projecting itself as a single-party-led export powerhouse with absolute hold over its financial system and a government with deep pockets. Investors have been rewarded with a decade of double-digit economic growth and a property market that has multiplied several times over the years. But this year seems different. Rising funding costs, a more volatile yuan currency, money market liquidity crises and companies defaulting on bond payments, which is rare for China, all have raised concerns that this could be China's Year of the Bear. Will the bears finally be able to say "told you so"? "It's going to be big, it's going to be historic, and probably going to be this year," says Gordon Chang, a Chinese-American lawyer and columnist who's been predicting a crash in China for the past 15 years or so. Xie, who has a decent track record in predicting major twists and turns in China's markets, is, however, mindful of how those who queue to hear his talks are agnostic when it comes to forecasting the definitive China crash. "They pay to listen to me, get scared, and then go out and feel good again. It's entertainment," he says. BUBBLES AND PERMA-BEARS There are varying scales of China bearishness. Moderate doubters, such as Xie, fret more about short-term asset bubbles than about the country's long-term ability to reform and evolve. Hedge fund manager Jim Chanos, who founded Kynikos Associates LP, has made money from short selling Chinese commodity stocks, while Aberdeen Asset Management fund managers have long been 'underweight' China due to concerns over the transparency and maturity of businesses there. To be fair, some short-sellers have enjoyed brief successes, such as when the Shanghai property market fell 40 percent in 2005-06 and the stock market <.SSEC> slumped in 2007-08. Despite being challenged and marginalized, the die-hard pessimists remain steadfast. These 'perma-bears' say China's export-driven, investment-fuelled economy is inherently unstable, not to mention the moral hazard wrought by a system where no one was allowed to fail. What keeps them believing? Chang, the New York-based lawyer, published his book 'The Coming Collapse of China' more than a dozen years ago. He says he just has a deep-rooted belief that China can't rig the game forever. His was a lonely bear voice in the late 1990s, but he remains convinced the Chinese bubble will pop. TIPPING POINT The China bear drum beat has sounded stronger this year, with slowing growth and evidence that private debt has climbed to twice economic output - levels that triggered debt crises in Spain and Ireland recently. Malaysia, Taiwan and Thailand are other uncomfortable precedents. China is at a tipping point, the bears argue, because President Xi Jinping's administration is determined to rebalance the economy towards consumption and away from investment - and that will bring a sharp slowdown and debt defaults. Chang argues the modernization of China's economy in the three decades since Mao Zedong's death disguises deep insolvency, deflation and corruption problems that will ultimately bring about its implosion. The crash, he says, would have come by now, but for the massive stimulus China unleashed in 2008, when the world was in the grip of a financial crisis. Other China bears, such as hedge fund manager George Soros, who successfully bet against the British pound in the early 1990s and also made money from the U.S. subprime crisis, are ringing the alarm bells, too. Soros recently wrote about China's "exponential debt growth", warning that such borrowing cannot be sustained for much longer than a couple of years. Morgan Stanley analysts have been routinely bearish on China, and warned last month it was at its 'Minsky moment' - the point, named after economist Hyman Minsky in 1993, when a credit boom fuelled by speculative funding messily unravels. Morgan Stanley warns this unwind in China could trigger a global corporate earnings crisis. DEBT TRIGGER Xie, who was labeled an 'American parrot' by Chinese local media in 2008 for repeatedly predicting a stock market collapse, expects a big crash in the property market. "In a year's time people will be really upset, but they don't want to talk about it now," he said. Michael Pettis, a professor at Peking University's Guanghua School of Management and a noted blogger, predicts China's growth will slow sharply to an average 3-4 percent in the decade to 2022. "We're no longer including in our growth those losses which we failed to recognize. So that reduces GDP to the correct rate and, as we begin amortizing losses, growth reduces even further," he says. Pettis acknowledges the risk that China's economy could hit a sudden stop the moment it reaches its debt capacity - the total debt a country can borrow without leading to financial difficulty. At the same time, he expects Beijing will manage to slow the economy and avoid bumping into that debt limit. For now, it seems that a debt mountain estimated at more than $20 trillion, and the difficulty in predicting how China will claw its way out, separate the bulls and the bears. From Japan's debt-driven 'lost decade' in the 1990s to the more recent euro zone crisis, the bears may have precedent on their side. "Debt is always misunderstood, it's emotive and when there's a lot of it, people assume it could all go horribly wrong. China certainly meets that condition," said Tim Condon, Asia economist at ING. "What makes it complicated is what is exactly the burning fuse here? The deck view is that it's just a fuse, and could be very long." |
How to Handle a Big Gain
by Jeff Miller
| Here is a happy problem: You have a large instant gain from one of your stocks. What should you do? The topic comes from an actual question raised at Scutify.com, where participants exchange ideas and get a wide range of opinions. (I get to play the role of the straight man in a world of day traders, revolutionaries, Bitcoin and gold zealots, and bubble callers. It is usually fun and there are some good ideas if you can sort through it all). The stock in question was trading about $4.00 yesterday and doubled in early trading because of a favorable ruling by an FDA Advisory Committee. Since I have nothing to add about the specific company, I am not going to name it. I want to use it as an illustration of how to think about risk and reward. (You can probably guess the stock, but please remember that my upside and downside targets are only illustrative). For the purpose of this analysis let's assume that the position size is appropriate for the trader or investor in question. The Standard Answer Most people would advise something like taking your original money off the table and playing with the "house's money." This gambling metaphor has broad psychological appeal. How would you feel if the stock dropped back nearly to zero? We know from the behavioral finance literature that people are much more sensitive to losses than to potential gains. The psychology of this situation is powerful. You could also add that the technical analysts might well be flashing warnings like the following:
The Fundamental Answer A fundamental analysis starts with a fair value for the stock. In the case of a binary event – the drug is approved or it is not – the calculation is straightforward. Let's do it both before and after the Advisory Committee decision. I am making up numbers here to illustrate a point. Each case requires good homework. Let us suppose that in the case of success the stock goes to 20. In the case of failure it will go to 50 cents. Next we need to estimate the odds of success. My newest investor program involves many companies with such issues, so I am doing a lot of work on the method. (Examples include companies facing litigation, restating earnings, turnarounds, potential takeovers, as well as new drugs. You would not want a big position in any single name, but a basket can work if you have edge in each case). Before the Advisory Committee, we might put the odds at 25%. That gives us a "fair value" of 25% times 20 plus 75% times 50 cents, or a value of 5 + 0.375 or 5.38. This was the price of the stock in the weeks before the decision, but it was a premium on the day before. This is what you might expect. After the Advisory Committee, let us put the odds of final approval at 90%. (Advisory Committees are usually respected). This gives us a value of 20 * .9 plus .5 * .1 = 18.05. The result, which might seem surprising, is that the investment is even more attractive at the higher price, after the decision, than it was before the announcement. Investment Conclusion The existing investor should not sell, since edge has increased. A new investor should be happy to join in, even at the higher price. The edge is greater. The fact that the price is higher is irrelevant to the current decision. I realize that this will seem counter-intuitive to most, but it is exactly what big pharma does in looking for candidates to buy – paying a higher price when the odds of success are greater. A Caveat on Risk Remember my earlier comment? Every investor should start by analyzing risk! If you take on excessive risk, you will make emotional decisions. The insightful investor does a dispassionate analysis of risk and reward – every time, every trade, every day. Find a good system that fits your personal risk profile and stick to it. Bonus Material Thoughtful readers might consider how to apply this in other settings. How about the overall market? 2013 saw the removal of lots of risk, starting with the fiscal cliff and proceeding through lower recession chances and better earnings. If you did not buy stocks in 2009 because risk was too high, and you have not increased your holdings since then because you missed the rally, you need to analyze your approach. There must be some combination of risk and reward that is attractive. If you have not found an appropriate balance of risk and reward to buy stocks in the last five years you are not an investor. You are either a permabear or a pundit! |
It's Not Just the Stock Market That's Rigged: the Entire Status Quo Is Rigged
by Charles Hugh Smith
| One has to wonder why we are dodging this truth about what we've become: a nation that turns a blind eye to skimmers, scammers and legal looting. CHS: While there are various regulatory “tweaks” that could be put in place, I wonder if we don’t need a more fundamental “re-set” that asks what role the market should play in finance and the economy inhabited by everyday investors. Scott: I think there are a lot of people in the industry wondering about whether there needs to be a massive overhaul. But it’s probably not a good idea for that to be imposed on the market by the SEC. The uncertainty would be potentially destabilizing. And I just don’t see it happening.If we pull back from the media frenzy about HFT, we find the market is rigged in many other ways. The Federal Reserve's policies, stripped of Orwellian mumbo-jumbo, are all about rigging the market to go in one direction--up. Consider this chart, courtesy of long-time contributor Harun I., of the Dow Jones Industrial Average: I call it the tale of Two Dows. In the Great Bull Market of 1982 - 2000, a market fueled by an extraordinary economic expansion, the DJIA gained an average of 610 points a year. In the anemic "recovery" of 2009 - 2013, the DJIA gained an average of 2,500 points per year. While the Fed rigged the 1990s Bull Market with low interest rates and other policies, it pulled out all the stops in the last five years:  The stock market is only the tip of the iceberg of what's being rigged. For a taste of what's rigged, ask yourself this question: if Mr. Elite Insider perpetrates a scam, and Mr. John Q. Citizen breaks similar laws, is there any difference between the treatment each receives? Let's go even deeper and ask: why is looting legal, even though it is obviously crooked? Why is high-frequency trading legal? Why is it legal for the Fed to offer money at 0% to its buddies but not to Mr. John Q. Citizen? Why is it legal to issue student loans to future debt-serfs that is unlike all other debt in that it cannot be discharged in bankruptcy? Since the legal looting continues unabated regardless of what party or toady is in office, then what actual difference is there between the Demopublicans and Republicrats? It's not just the stock market that's rigged--the entire Status Quo is rigged. There are two sets of laws and two sets of opportunities: one for those holding the concentrated wealth and power, and the other for the rest of us debt-serfs. If the system isn't rigged, then why are insolvent banks and bankers protected from the creative destruction of capitalism that befalls John Q. Citizen when his risky bets go bad? Why do we as a nation keep insisting the Emperor's new clothes are splendid when he is in fact parading around buck-naked? One has to wonder why we are dodging this truth about what we've become: a nation that turns a blind eye to skimmers, scammers and legal looting. Perhaps, in Joseph Conrad's phrase, we hope to escape the grim shadow of self-knowledge. Here is the passage from Chapter 7 of Lord Jim: I gave no sign of dissent. I had no intention, for the sake of barren truth, to rob him of the smallest particle of any saving grace that would come in his way. I didn't know how much of it he believed himself. I didn't know what he was playing up to--if he was playing up to anything at all--and I suspect he did not know either; for it is my belief no man ever understands quite his own artful dodges to escape from the grim shadow of self-knowledge. |
New risks to commodities on downgrades to China growth, Ukraine tensions
by Commodity Online
| In a report it pointed out that it views crude oil, diesel, natural gas, palladium, nickel and grains as the markets most sensitive to an escalation in geopolitical risk surrounding Russia and the Ukraine. 03 Apr 2014 LONDON (Commodity Online): Downgrades to the China growth outlook and the threat of an escalation in geopolitical risk surrounding Ukraine have introduced ongoing event risk for commodity markets this year, according to Deutsche Bank. In a report it pointed out that it views crude oil, diesel, natural gas, palladium, nickel and grains as the markets most sensitive to an escalation in geopolitical risk surrounding Russia and the Ukraine. Meanwhile demand prospects for industrial metals and bulk commodities will be the most vulnerable among the five broad commodity sectors in the event that Chinese economic activity fails to recover. -The one bright spot in our macro assumptions is the US. After disappointing real economy data over the winter months, triggered in part by extreme cold weather, we expect the next few months will be characterized by positive growth shocks. However, we expect this will prove problematic for the precious metals sector and specifically gold since stronger growth in the US will tend to deliver further advances in US real yields, the S&P500 and the US dollar. Events in Ukraine have highlighted once again the strong interdependency between the EU and the Russian Federation. However, Europe’s slow progress in shale gas exploration and the prospect that North Sea oil production will continue to disappoint suggest little near term relief in the region’s dependency on Russian energy imports. Similarly Russian efforts to diversify its energy exports towards Asia have so far also proved elusive. Europe imports 32% of its crude oil, 33% of its thermal coal and 12% of its gasoil requirements from Russia. In addition, Europe is dependent on Russia for 30% of its natural gas supply, of which about 50% of these imports, or 15% of EU gas supply, arrive via Ukraine. For the time being the crisis in Ukraine has so far not triggered any reduction in natural gas flows from Russia into Europe. Moreover, factors which will moderate the potential impact of any disruption to natural gas flows is the fact that gas storage levels across Europe are at unusually high levels owing to a mild European winter. However, Russia still remains an important global commodity producer, accounting for 33% of global palladium production and between 10-12% of the world’s production of nickel, crude oil and platinum. The threat of economic sanctions on Russia could have far-reaching implications for commodity markets and the broader world economy. Indeed Russia is also a major source of European oil products, most particularly diesel. Any disruption to this supply could therefore significantly impact global oil prices. Ukraine is also a major agricultural producer and consequently any disruptions to the country’s exports or plantings in the eastern part of the country could have a meaningful impact on global balances. |
Ex-Berlusconi government official arrested for mafia collusion
By Amalia De Simone and Steve Scherer
| NAPLES (Reuters) - Italian police arrested a former member of Silvio Berlusconi's government, accusing him of colluding with the mafia to quash competition against his family's petrol distribution business near Naples, officials said on Thursday. Nicola Cosentino, an undersecretary in the Economy Ministry from 2008-2010 and the ex-boss of Berlusconi's party in the region around Naples, was arrested along with 12 others on suspicion of extortion and unfair competitive practices. The Italian mob has always sought alliances with business and political leaders, even at the highest levels. Seven-time Prime Minister Giulio Andreotti was acquitted of mafia charges, but found to have had ties to the Sicilian Mafia's top bosses before 1980. Berlusconi himself has been investigated, though never tried, for ties to organized crime. In a statement, Naples anti-mafia prosecutors say Cosentino, his two brothers Giovanni and Antonio, and two brothers of mob boss Antonio Zagaria set up a "criminal system" to control the local petrol distribution market. |  Nicola Cosentino gestures during a media conference in Naples January 22, 2013. REUTERS/Ciro De Luca |
| Cosentino used his political sway in local administrative offices to favor his family business and create bureaucratic obstacles for the competition, while the mob intimidated and extorted petrol distributors not owned or supplied by Cosentino's company, prosecutors said. Cosentino had a "stable relationship based on common interests" with members of the local mafia, known as the Casalesi clan, prosecutors said in a statement released after the arrests. Two Cosentino lawyers did not immediately respond to calls for comment. Among those arrested on Thursday were two employees of the Italian unit of Kuwait Petroleum International (known by its trademark Q8), which refines and distributes petroleum products around the world for the state of Kuwait. The employees were complicit in favoring the Cosentino family business, prosecutors say. The company had no immediate comment, but said it planned to release a statement later. This is Cosentino's second arrest for mafia charges in a year. After losing parliamentary immunity, he turned himself in for separate charges in March of 2013. He was later put under house arrest and then released in November. That trial is ongoing and Cosentino has denied any wrongdoing. Mafia groups in the southern regions of Campania, Calabria, Apulia and Sicily continue to use violence and threats to control their local economies, and they do not hesitate to threaten officials who refuse to cooperate. Threats against local government officials have risen 66 percent since 2010, when the figures were first collected, according to a report published last month. |