Thursday, June 11, 2015

Hindenberg Confirmation

Second day that all Hindenberg criteria meet.

Need two observations to confirm.

The criteria

Here are the FIVE requirements for a Hindenberg:

  1. The daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day.
  2.  The NYSE 10 Week Moving Average is also Rising, which we consider met if it is higher than the level 10 weeks earlier. This is different than looking at the current slope of the NYSE 10 week simple moving average. The slope can show rise while the overall level is lower. This is a criteria fail despite looking like a criteria pass
  3. The McClellan Oscillator is negative on that same day
  4. New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows, however it is okay for new 52 Week Lows to be more than double New 52 Week Highs
  5. There must be more than one signal within a 36 day period, i.e.,there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock market plunge.

Todays internals:

Markets Diary

4:09 PM EDT 6/11/2015
Issues NYSE Nasdaq NYSE MKT
See 4 p.m. Closing Diaries. Volume updates until 8 p.m.
Advancing 1,936 1,429 164
Declining 1,231 1,361 205
Unchanged 88 127 28
Total 3,255 2,917 397
Issues at
New 52 Week High 108 127 2
New 52 Week Low 91 30 13

Ten year JGB's Yield Trend Changing

The Kyle Bass Japanese Bear Trade perks up:

Wednesday, June 10, 2015

Half a Hindenberg Occured Today

Half a Hindenberg occurred today. Need to observations to confirm.

Here are the FIVE requirements for a Hindenberg:

  1. The daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day.
  2.  The NYSE 10 Week Moving Average is also Rising, which we consider met if it is higher than the level 10 weeks earlier. This is different than looking at the current slope of the NYSE 10 week simple moving average. The slope can show rise while the overall level is lower. This is a criteria fail despite looking like a criteria pass
  3. The McClellan Oscillator is negative on that same day
  4. New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows, however it is okay for new 52 Week Lows to be more than double New 52 Week Highs
  5. There must be more than one signal within a 36 day period, i.e.,there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock market plunge.
The hardest to get is number one. From WSJ:

Markets Diary

4:10 PM EDT 6/10/2015
Issues NYSE Nasdaq NYSE MKT
See 4 p.m. Closing Diaries. Volume updates until 8 p.m.    
Advancing 2,262 2,051 223
Declining 894 758 146
Unchanged 97 107 29
Total 3,253 2,916 398
Issues at
New 52 Week High 128 165 3
New 52 Week Low 84 41 19

Possibly a period of heightened volatility.

Tuesday, May 12, 2015

A Few More Bullish Underpinnings

So I wrote about the payrolls pump yesterday.

Global equities are down solidly overnight.

The Bloomberg Financial Conditions Indices remain unaffected. The EU version is even up sharply.

Some more bullish thoughts include the following:

AAII bull ratio shows small investors throwing in the towel. It's a blunt timing instrument. Nevertheless, it is (contrarianly) bullish. Note the uptrend channel intact for the SPY as well.

Next, notice the BKX Banking index. Financials are a leading indicator.

It sports large relative strength and sits at its highs. The BKX is a glaring green bean. It nears the top of their trend channel. Near term, this is an obvious stalling point. Longer term, this is a bullish underpinning.

If the BKX holds here or moves higher, despite general market weakness, look out above for the next move higher when selling abates.

Monday, May 11, 2015

Payrolls Pump

Nice gains from Payrolls Friday.

Bloomberg Financial Conditions Index for EU has surged higher (improvement). Given sketchy Greece-fire, market doesn't seem to care that much on default. Already priced.

US version rallies back to .7 STD above normal. No breakdown here. Bullish underpinning.

Little downside traction on pre employment selloff.

Market's path of least resistance remains up.

Friday, May 1, 2015

Signs of US Technical Weakness

Growth stocks act very soft and mushy. When the leaders fail, the market tends to have trouble moving higher.

Here are a couple of charts that merit review. The first is net new highs. It shows very strong long term resistance since 2014 and a near term breakdown. This shows the failing leadership.

Note the Wilshire 5000 trendline break.

The second chart is the VIX. It broke two near term trendlines towards higher volatility yesterday.

Since the beginning of April's rally, the NASDAQ flashes four distribution days - declines of at least 0.2% on heavier volume than the prior session. It broke its 50 day SMA yesterday.

The third chart shows the sharp breakdown in the Russell 2K below its 50 day SMA. The Russell also broke its relative strength uptrend vs the SP 500 in play since last October.

Thursday, April 16, 2015

Building Signs of EU Credit Stress

(Edit: Today, April 17th, I added the Greek 10yr chart below to LIBOR and the EU FCI graphs.)

Two charts


Greek Stress from April 17

Friday, March 20, 2015

AAII Sentiment Contrarianly Bullish for US Equities

Bullish for stocks. NASDAQ broke out, pulled back to test the breakout with a hard shake last week. McClellan Oscillator became quite oversold, sentiment soured (see graphic), and were set to move higher.

Wednesday, February 25, 2015

Checking and Savings Accounts with Negative Rates of Interest

This is a nice piece flushing out some of the issues of cash versus electronic bank accounts in an inverted, short term negative interest rate environment.

The author avoids discussing capital controls against cash withdrawls. This would be instituted by .gov to control against what he proposes. This would be logical .offshute from a negative interest rate regime. It further punishes savers, savings and prevents bank runs.

On an ad hoc basis, this is already somewhat the case. Certain branches of TBTF banks will drastically limit (4 figures) the amount of cash a branch will allow you to withdraw on both a given day and in total from them. WFC comes to my mind. You would have to find and idiosyncratic branch manager willing to authorize large cash removals.

The EU is the space to watch on this.

The zero bound debate – are negative rates a tightening of policy?

Matt’s and James’s recent blogs outlined some of the issues markets face when rates go negative. This is obviously no longer just a theoretical debate, but has real investment implications. Why do investors accept sub-zero rates when they can hold cash ?

To recap using Swiss Francs for example, it makes sense for a saver from a purely economic view not to deposit a Swiss Franc note into a negative yielding bank account, as it will be worth less when it gets returned, due to negative rates.

However, the saver faces risks by holding physical cash as they don’t receive the security benefits from using a bank account (ie paying for an electronic safety box). The use of the old fashioned lock and key is not as convenient as a bank account, but would make increasing sense to use as deposit rates get more and more negative. This demand for owning physical as opposed to electronic cash is not confined to cash accounts. In theory, as the term structure of interest rates falls below zero, bond investors should sell their bonds and own “cash in a box”  instead. How efficient is it to do this?

The great problem with using paper money as a saving instrument is that its inherent best in class liquidity also makes it vulnerable to fire and theft. From an individual’s perspective, the use of a secure fire proof safe deposit box in a bank or a secure location away from home is the best starting point. The optimum solution however relies on economies of scale. Is this easily achieved?
As an investor, diversity makes sense. Therefore, an individual should spread their cash over a wide selection of safety deposit boxes in a wide variety of very secure locations. An improvement, but currently not that practical. But there could be a way to achieve the above goals relatively efficiently and cheaply.

In a negative interest rate environment  there are likely to  be enough investors who want to own bearer cash for a network of highly secure safe deposit boxes to be developed by a bank or institution. This means there would be a high degree of security and diversification regarding the location for the cash. In order to make the cash available to the investor easily, certificates of deposit could be issued physically or preferably electronically. This would allow the investor to transfer money easily, as they would only need to go to their nearest depository to deposit or access the cash, or their nearest bank if a bank agrees to physically deposit or withdraw cash for them.

Basically this ends up being a bank account where the cash does not get lent, but has a custodian holding charge. In theory, in the extreme, you could even develop markets in exchange traded derivatives issues that are linked to cash held in a depository, to allow individuals and large institutions to manage cash as a saving instrument with no negative yield. A new efficient savings industry could be developed in a negative yield environment, so limiting the downside to the sub-zero bound for short and long term interest rates.

One side effect would be that all these savings would have to be held in real cash, which will mean an increase in the demand for physical notes. If cash is held in custody and is not lent on then the supply of money in the economy for normal transactions will fall. This begins to sound deflationary, and runs counter to why sub-zero policy is being pursued.

As long as cash exists in a physical bearer form it is hard to see how you can have significant negative rates of interest in an economy where government debt and cash are the obligations of the same entity, as they are truly fungible. At its worst, monetary policy of sub-zero rates could encourage a deflationary spiral. Maybe the only policy left to create inflation is real and not conservative QE (see my last blog).

Friday, February 20, 2015

Bullish Breakouts and Underpinnings in US Equities

Last month I was expressing my macroeconomic concern over a sinking European economy dragging the US lower, the negative shock from a Greek exit out of the Eurozone, and if the market would think the ECB’s quantitative easing amount was big enough to arrest EU deflation concerns.
Things change quickly on Wall Street. 

Given some very important relationships and indicators, I’m bullish.

I want to give you a bird’s eye view of the technical landscape to show you why I think we have the potential for a strong rally. So let’s dive right in.

First, it may sound simple and obvious but one of the most bullish things a market can do is go up. And indeed the U.S. has. We have breakouts to new trend highs in the S&P 500, Russell 2000, and NASDAQ Composite. You can see this below: 

Below, I will show you the money flows that are fueling this. 

Notice the small cap Russell 2000 has broken out of an eleven month base dating back to last March. This nearly yearlong basing structure is a powerful platform and springboard to start a new uptrend.

 And small caps continue to benefit from the strong rally in the dollar.  It comes at the expense of large cap international stocks. 

Large cap multinationals have huge exposure to the dollar. A strong dollar makes their products more expensive overseas and negatively impacts profits. Small caps, by comparison, derive their profits here in the US and avoid this issue. They become relatively more attractive.

You can see this effect in the relative rotation graph of the major US averages below. Note how the small and midcap ETFs are solidly in the green outperforming box. The Dow and NASDAQ NDX (the 100 largest NASDAQ listed stocks) are headed down and into the weakening yellow box. 

Alpha Trader’s stock picking sights remain firmly focused on the small and midcap sectors of the market. And this week we have…….. But more on that later.

I see a growing sign of strength in an important technical indicator. The net new high indicator measures the numbers of stocks making new highs in the market minus the number of stocks making new lows. 

You want to see net new highs expanding and increasing as the market rallies.

This shows a bullish underlying condition. An expanding number of “foot soldiers” are helping lead the market higher. This shows strong new high breadth.

If just a few stocks are making new highs, this shows a shaky, weak internal foundation. Once these few stocks falter, there are none to take up the slack. 

The broad market net new high indicator below shows three important signs:

Point one shows the smoothed 10 day moving average of net new highs is in a strong uptrend since its October low. 

Point two shows new highs continue to expand sharply into positive territory while new lows have contracted. You can see that the market tends to correct, sometimes sharply, when new lows expand.

Point three shows a bullish ascending triangle. You can see the indicator coiling. A breakout above the blue twenty one month downtrend line would be very bullish and show a broadening and surging amount of net new highs. 

Earlier I mentioned that something was fueling this move back into stocks. There is one more important bullish flag I see. It’s the selloff at the long end of the Treasury market. 

The long end of the Treasury curve is made up of the 10 year note, 30 year bond, and 25+ year zero coupon bonds. All three are extremely sensitive to economic growth prospects, inflation, and geopolitical concerns (the flight to safety bid). 

They are economic coal mine canaries.

When growth prospects are poor and inflation is low or nonexistent, Treasuries tend to do well and rates decline. Investment managers pare back on stocks (a relatively poorer prospect) and move those assets into Treasuries.

By contrast, when economic growth is strong or strengthening, Treasuries tend to do poorly and rates rise. This is because investment managers shift money back out of Treasuries and into higher growth producing vehicles like stocks. 

This is what’s happening now.

In the chart below, you can see the most recent shift out of Treasuries and into equities. Note how stocks have surged and prices at the long end of the curve have tanked.

This shows a large scale asset allocation shift back into stocks. This is the kind of fuel that propels persistent uptrends. 

Now, this is not to say the ride won’t be bumpier than usual. I believe it might be. 

I bring your attention to the VIX volatility index. The level of volatility remains elevated. You can see this difference between the lows of the yellow box and the current higher lows in the purple box. 

 As long as the VIX stays below the $23 high marked with the black trend line, the market should continue its upward bias with investors willing to buy dips.  

This level is key because it was created under the following sharp stressors: fears of a Greek exit on the Eurozone and whether the ECB’s quantitative easing amount was large enough. 

The drop in the VIX shows these concerns are less and trending lower. This is bullish for the stock market. 

A move back above the $23 level would show market concern that a problem is flaring. I don’t expect this, but it is an important “line in the sand.” 

To recap, the three major US market averages all have new bullish breakouts. This confirms their primary uptrends and shows the potential for a broad equity move higher.

The small and midcap areas are outperforming. This is the sweet spot for my stock focus. 

Interest rates have risen. This shows investment managers are moving away from Treasuries as a defensive, protective strategy and back into stocks. This provides money flows back into “risk-on” equities for growth. 

And while it may be a bumpier road near term, the trend of U.S. equities remains up.

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.

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"The New Drivers of Europe's Geopolitics is republished with permission of Stratfor."