Meanwhile gold miners ($GDX) continue to act like a monster breakout to the upside is possible:

“A lower value of the euro would reduce the prices of eurozone exports and raise the cost of imports, reducing or eliminating the current account deficits of the peripheral European countries, since about half of their trade is with countries outside the eurozone. The weaker euro would also boost Germany’s net exports, raise German wages and prices and reduce the trade imbalance within the eurozone.

The increase in peripheral country net exports would also raise their gross domestic product and so reverse their recessions that were caused by higher taxes and cuts in government spending. That would make it politically easier to achieve the needed fiscal consolidations. And shifting from recession to growth would raise business incomes and employment, reducing the volume of bad loans and mortgage defaults now hurting the banks.”

How to ensure this rapid decline in the euro ($EURUSD $FXE) takes place?

“The decline of the euro can therefore occur without specific action by the European Central Bank. But a further shift by the ECB toward a looser monetary policy would speed the euro’s decline.”

Get ready for more policy actions by the ECB and the potential for the so called “armada” of ECB policy responses (more LTROs, lower collateral requirements, rate cuts to zero, and QE-style asset purchases), which the IMF recently strongly advocated, has greatly increased in recent weeks. A pairs trade such as long $VGK/short $SPY might be a perfect contrarian idea with an excellent risk/reward in the event that the ECB does ease aggressively and manages to pull the eurozone back from the brink.

]]> http://www.robertsinn.com/2012/07/24/the-chart-of-the-day-8/feed/ 0 http://www.robertsinn.com/2012/07/24/coming-to-a-head/ http://www.robertsinn.com/2012/07/24/coming-to-a-head/#comments Tue, 24 Jul 2012 13:56:30 +0000 Robert Sinn http://www.robertsinn.com/?p=9539 The tension is building, can you feel it?

Spanish bond yields are soaring to euro area all-time highs and CDS on Spanish debt is blowing out:

Sentiment is pervasively bearish and the guy who hasn’t been able to do much of anything right during the last two years says there is a 50% chance that the euro will unravel over the next two years: “John Paulson Said to See 50% Chance Euro Will Fail”

Ratios such as $DIA/$IWO, $SPY/$IWM, and $GLD/$SLV continue to point to widespread risk aversion and defensive positioning. Meanwhile, the Dow theorists continue to point to the weakness in the Transports ($IYT $TRAN) and the series of lower highs which offer a clear divergence from the series of higher highs in the S&P 500:

To top it all off (and trust that I could keep listing things but you get the point by now) yesterday we received an infamous confirmed “Hindenburg Omen”. So what does it all mean and what will happen next?

If we think back to the “Flash Crash” of May 2010 and the early August plunge of 2011 there were a few things in common with both events:

• Market participants were generally positioned fairly bullish with a general sense of complacency – the $VIX was relatively muted and rose rapidly as panic set in
• Both corrections occurred rapidly amid a “buy the dip” mentality which dealt out a great deal of punishment to the vast majority of market participants
• There were powerful catalysts which emerged suddenly and took the market by surprise (Greece in 2010, Italy yields skyrocketing, emerging US recession fears, and US downgrade in 2011)

There is no doubt that this market could crash given the right set of catalysts (Spain is certainly a powerful enough catalyst), however, the lead up to the current market situation has been far different from the prior two summers – markets are almost bracing for another large leg down, whereas, in 2010 and 2011 the vast majority were caught flat footed and unprepared when turmoil began to spread across markets. This does not mean that markets cannot go lower, it just means that the likelihood of a large downdraft is much less this time around. Remember that if everyone is expecting something to happen, when it happens it isn’t a surprise……

 Click to enlarge

Moreover, there is a rare equilibrium in the percentage of NYSE stocks trading above their respective 200-day moving averages:

52.25% of NYSE stocks are currently above their 200-day moving averages which also happens to form a perfect confluence with the 50 and 200 day SMAs on the above chart. There are many other examples of charts at or near key breakout/breakdown levels such as the gold ($GLD)/silver ($SLV) ratio:

With so much energy building the current curious equilibrium across markets is unlikely to last much longer.

Click to enlarge

VIX Summer 2011:

Last summer the VIX was well above 20 by the end of July with the shorter term moving averages rising quickly.

VIX Summer 2012:

Today’s large bodied black candle off the gap above the 50-day SMA is a sign that while market participants are concerned about Spain, they are far from panicked – this is definitely something to keep an eye on over the coming days.

]]> http://www.robertsinn.com/2012/07/23/nothing-like-2011/feed/ 0 http://www.robertsinn.com/2012/07/22/sage-weekly-letter-7222012/ http://www.robertsinn.com/2012/07/22/sage-weekly-letter-7222012/#comments Sun, 22 Jul 2012 19:49:36 +0000 Robert Sinn http://www.robertsinn.com/?p=9488 Last week really began on Tuesday morning with the Fed Chairman’s testimony to the Senate Committee on Banking, Housing, and Urban Affairs. Bernanke highlighted the usual downside risks to the economy and once again urged Congress to “address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery”, however, it was the following two quotes which stood out from the rest and left market participants wondering:

“In all, the PCE price index rose at an annual rate of 1-1/2 percent over the first five months of this year, compared with a 2-1/2 percent rise over 2011 as a whole. The central tendency of the Committee’s projections is that inflation will be 1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014……

Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” Federal Reserve Chairman Bernanke July 17, 2012

It still remains to be seen whether the Fed is indeed prepared to take further action, however, there can be no doubt that the odds of further action have increased in recent weeks as inflation data has continued to cool (CPI now running at 1.7% year over year) and employment numbers remain quite soft.

It is important to remember that QE2 was launched in late 2010 primarily in response to a deflation threat; therefore, if the Fed begins to see inflation coming in toward the lower end of its 1.2 to 1.7 percent range another round of QE will quickly become a foregone conclusion. Moreover, the continued strength in the dollar and decline in the euro has begun to make itself felt across corporate America with companies such as Ford ($F) facing an uphill battle with regard to sales volumes and pricing throughout Europe. Additional Fed balance sheet expansion would likely serve to at least halt the dollar’s advance – I believe that this factor will also play a large role within the FOMC as the committee debates additional easing actions.

Last Friday markets were reminded that the eurozone debt crisis is still lurking in the shadows even if we don’t hear about it every day. The following two charts help to illustrate some of the enormous challenges facing Spain:

Recall that housing prices in many areas of the country fell by more than 50% after the US housing bubble burst – given that by most accounts the Spanish housing bubble was at least as frothy as our own, it looks like Spain has additional pain ahead which means more bank failures and bailout funds for the few left standing.

As the Spanish economy contracts further the regional governments are having substantial difficulties funding themselves and we are now seeing the regions begin to line up alongside the banks for bailout funds. Expect to see more of this over the coming weeks and I believe it is increasingly likely that Spain will fall into a ‘troika program’ before the end of the year as it finds itself increasingly shut out of capital markets.

With the situation in Spain and throughout much of the eurozone periphery remaining highly stressed it is incumbent upon the ECB to cut rates all the way to the zero bound. However, interest rate cuts will have limited effects particularly in the context of a problem of capital flight from rapidly worsening economies in Southern Europe. Bank bailouts and liquidity provisions will only go so far, the weaker eurozone members need more competitive export economies. As Barron’s pointed out last week if $EURUSD were to fall to parity it would go a long way toward fixing much of what currently ails the eurozone. How does the ECB go about engineering such a currency devaluation and would this set off another round of competitive global currency devaluation? After all, heavily indebted countries always want to have a weak currency because it helps to redress imbalances and inflation makes it less painful to be a debtor.

Current Market Structure

The S&P 500 managed to slightly surpass its July 3rd high before pulling back roughly 1.5% to end the week at 1362 – bears will point to an assortment of potentially bearish technical occurrences last week including:

$SPX continues to find resistance at the upper median line of the Andrew’s pitchfork drawn from the May 2011 high, August 2011 low, and April 2012 high:

The Nasdaq-100 ($QQQ) found resistance above the 65 level once again and pulled back hard into Friday’s close printing a large bodied bearish candle:

The recent significant underperformance (2.71% since July 6th) by the Russell 2000 ($IWM) vs. the S&P 500 ($SPY) is concerning and somewhat reminiscent of what we witnessed during late-July 2011 before the big August plunge:

Meanwhile, some positive signs can be found in commodities ($CRB) and the recent strong performance by energy stocks ($XLE):

While commodities and energy stocks are not exactly the desired market leaders, given that much of the current bull vs. bear debate centers around disinflationary pressures, deflation, and global growth – the fact that commodities (oil in particular) have picked up in recent weeks certainly does not lend itself to the bearish argument.

It is not difficult to make a bearish case for equities right now given the renewed eurozone concerns, a lackluster earnings season thus far, the impending US fiscal cliff, etc. However, with sentiment about as poor as it has been at any point over the last two years and many already loudly calling for a repeat performance of last August, it seems to me that a large decline in equities is unlikely. Whereas, a much more likely scenario for the remainder of the summer is a continuation of the frustrating range trade with declines quickly finding support and advances running into resistance just shy of $SPX 1400.

In summary, from my estimation the current market situation is virtually perfectly balanced in terms of the merits of both the bullish and bearish camps. It is in the context of such an environment that I believe it is most important to employ market neutral strategies (or with as little directional bias as possible) and/or participate as little as possible until at least some modicum of clarity arises.

My most important chart for the week ahead is the Spanish IBEX, while Spanish yields make new all-time highs Spanish equities have yet to make new lows – it will be important to see whether the IBEX makes a higher low, double bottom, or plunges to new lows over the coming days/weeks:

My best trade ideas for the week ahead along with my model portfolio service are available over at my premium site

]]> http://www.robertsinn.com/2012/07/22/sage-weekly-letter-7222012/feed/ 0 http://www.robertsinn.com/2012/07/21/potential-catalysts-for-gold/ http://www.robertsinn.com/2012/07/21/potential-catalysts-for-gold/#comments Sat, 21 Jul 2012 15:38:42 +0000 Robert Sinn http://www.robertsinn.com/?p=9480 One doesn’t have to be a master technician to see the energy building in the gold chart as price coils near the center of the recent $1550-$1620 range:

So what are the potential catalysts that could decisively break gold out its recent range during the coming weeks?

• July 31st China manufacturing PMI
• August 1st FOMC announcement
• August 2nd ECB announcement and Draghi press conference
• August 3rd US July non-farm payrolls report
• August 7th China CPI, PPI, industrial production, and retail sales
• August 14th-15th US PPI & CPI

Not to mention the usual potential for eurozone meltdown fears, spiking bond yields (such as we saw with Spanish yields on Friday), and unplanned policy easing announcements from the usual suspects (ECB, Fed, PBOC, etc.) – what else am I missing on this list?

Given that gold is forming a large descending triangle  and $GLD August options are pricing in barely more than a 3% move over the next month an options straddle is an excellent trade idea – Sage Premium users put this trade on heading into my 33rd birthday weekend, enjoy your weekend!

]]> http://www.robertsinn.com/2012/07/20/the-golden-triangle/feed/ 1 http://www.robertsinn.com/2012/07/20/momentum-vs-value-investing/ http://www.robertsinn.com/2012/07/20/momentum-vs-value-investing/#comments Fri, 20 Jul 2012 13:01:37 +0000 Robert Sinn http://www.robertsinn.com/?p=9458 In equity markets there are a few timeless debates that will never go away. We all know about the constant struggles between fundamental and technical analysis or the battle between active managers and those who take a more passive approach. However, perhaps the most interesting and intellectually stimulating debate is offered by momentum investing vs. value investing.

Momentum investors buy stocks that are experiencing fundamental momentum in their businesses and price momentum in their share prices, while shorting stocks which are experiencing fundamental business challenges and strong downward price trajectory in their share prices.

Value investors look to identify stocks trading at attractive valuations within share price downtrends due to the market’s perception that the company’s business is experiencing a slowdown and/or faces mounting challenges.

There is no single answer as to how to achieve investment success – in fact many highly successful investors use a combination of both momentum and value investing strategies. Moreover, both momentum and value investing suffer from similar shortcomings and challenges: Successful momentum investing relies on key judgment calls such as when to take profits and how to identify the signs of slowing fundamental and technical momentum, whereas, successful value investing depends on the investor to identify companies that are cheap for the wrong reasons (flawed market perception etc.).

There are a multitude of examples of both types of investing but this morning’s example of lost momentum in a stock that was last year’s top performer in the S&P 500 is extremely noteworthy:

Aside from the fundamental challenge of maintaining 20%+ earnings & revenue growth and 30%+ annual share price gains there were strong warnings in the chart recently that trouble may lie ahead. Notice the heavy distribution days April 19th-24th and then again on June 27th and 28th – this was one of the main reasons why I decided to take bearish positions heading into yesterday’s earnings report.

The CMG example demonstrates how quickly momentum can go awry and just how difficult market timing can be. Not only is CMG a momentum portfolio manager favorite but the stock received an upgrade to buy with a $490 price target from Citi on Tuesday morning:

“We think SSS for 2Q could be in the 10-11% range which would be better than some recent sell-side checks that indicate sales trends moderated into the 7-8% range. Although there may be some pressure on the high end consumer due to macro concerns, we think they continue to spend on affordable luxuries such as natural and organic food.” Citi CMG upgrade 7/17/2012

Thanks guys, got any other great ideas?……

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