Buzz on the Street: Investors Become Cautious After Earnings Reports, GDP Estimate Cuts
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, July 22, 2013
FTSE 100: Why Poor Earnings May Not Be the Reason for Sluggishness
On Friday, the UK’s FTSE 100 (INDEXFTSE:UKX) index dropped from a seven-week high. Shares of HSBC got downgraded that day, and that was said to be the culprit.
However, from an Elliott wave perspective, the real reason was the fact that the index is likely nearing a top of its corrective rally.
On June 27, we wrote on these pages that the FTSE had finished a 5-wave decline for a larger-degree wave 1, and a rebound in wave 2 was due.
Since then, the FTSE rose 380 points, a 6% gain. And looking at the wave patterns today, prices appear to be grinding into a short-term high now.
For one, the May-June decline was a clean five-wave move; those define the trend in Elliott wave analysis. Prices are losing momentum now, as evidenced by the bearish RSI divergence shown on the daily chart below (red dot).
Next we need to see a downside acceleration soon to justify a bearish outlook on UK equities. Today's close of 12 points lower might be the start. Only a push above 6700 on the FTSE 100 will have us reviewing alternate scenarios.
For those who wish to try and take advantage of this potential near-term opportunity, there is a multitude of ETFs with European exposure to consider.
(Adapted from Elliott Wave International's July 19 European Short Term Update, edited by Chris Carolan.)
The FOMO Market
The unrelenting rise in U.S. stocks continues as the Fear Of Missing Out (FOMO) propels investors into what may now be a very crowded U.S-centric trade. Meanwhile, homebuilders (NYSEARCA:XHB), which I have discussed several times before, continue to lag on the realization that spiking mortgage yields don't actually bode well for the biggest source of reflation the economy has. Counter-balancing this is strong movement in emerging markets, which we continue to track closely for an allocation in our mutual fund and separate accounts.
Euphoria can easily continue for domestic markets, but I'd rather play mean reversion from the bottom than the top. Further momentum in emerging market equities, should it hold, could be a beautiful trade. What's coinciding with this? A continued breakdown in the dollar, which has a trend that seems to favor near-term.
An interesting story hit the wires Saturday, which commodities markets, in their usual complacency, have failed to react to so far. Basically, the Feds are sending signals that they intend on reviewing the 2003 decision that allowed banks to trade in physical commodity markets.
Then this morning, we get the story that a US HFT oil trader was fined $903,176 for deliberate manipulation. Are the US and UK joining forces and preparing an attack on oil speculators, who have driven the price up to such dangerous levels, levels which analysts cannot justify? That would certainly put an interesting twist on matters as we approach the critical mass 110 level. Moves above 110 have coincided with heavy drawdowns in equities the past two years, -20% in 2011 and -10% in 2012 (see chart).
Tuesday, July 23, 2013
Everyone's Gone to the Moon
Yesterday's headline read, "Dealbreaker reports that an unnamed BMO analyst is leaving the firm for the opportunity of a lifetime. Dear Colleagues (he writes), it is with sadness that I am emailing you to say farewell on my final day here at BMO. However, it is with great pride and excitement that I am able to announce my future plans. Just this week, I was informed that I was selected from among tens of thousands of applicants to participate in a highly experimental civilian travel program coordinated by NASA and the U.S. government. In September I will pack my bags for Florida where I will begin a one-year training program, which will culminate in a six-month trip to the International Space Station." "To the Moon, Alice," to quote that great American economist Jackie Gleason; and that is what yesterday's trading action felt like - that everyone had gone to the moon.
Obviously, there isn't much to say about Monday's trading other than the only way to make money was to erect a "toll gate" at last Friday's closing price (1692.09) and collect a toll every time the S&P 500 (INDEXSP:.INX) (SPX/1695.53) crossed that flat-line because it crossed it a baker's dozen of some 13 times. The session was punctuated by the revelation that more money flowed into equity centric ETFs this month than in any month in the past five years. That caused Jason Goepfert, of the must have Sentimentrader.com organization, to write, "The Liquidity Premium for the S&P 500 (10-day average) just entered extreme territory, suggesting that investors have become more comfortable holding individual stocks instead of the 'safety' of the exchange-traded fund. Past corrections have usually seen the 5-day average hit an extreme, then the 10-day, then finally the 21-day. The latter isn't yet at an extreme, so it's something to watch for in the coming weeks (see chart)."
That news caused my phone/email to light up with the question, "With all the money flowing into the equity markets, don't you think you are wrong about a pullback?" My response, "Well, markets can clearly do anything, but in this business you have to play the odds; and such headlines are what you tend to see clustered near trading tops." In addition, to all the reasons given over the last few weeks for my short/intermediate "topping call" in and around July 19, it's worth noting that over the past 10 years, nine of the 10 macro S&P sectors have declined from here into the first week of August. Manifestly, in this business you play the odds or they carry you out in a "box." Moreover, while certain indices are breaking out to the upside, others are breaking down. Meanwhile, the entire equity market is WAY overbought.
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The weekly JPMorgan Treasury client survey was released this morning and remains relatively long.
-Longs up to 23% from 21%
-Neutrals down to 64% from 66%
-Shorts unchanged at %13
-Net long up to %10 from %8
This is the most aggressive net long positioning since November 2012 and is a cautionary reading for pressing any bond longs here.
The positive side is that if this long positioning is sustained over the coming weeks, it will be a much better medium-term bullish signal. Over the last two weeks, active positions have covered their very aggressive shorts and remain more neutral.
Regional banks remain for sale from the open with the S&P Regional Banking ETF (NYSEARCA:KRE) peeking into negative territory, despite a 10-year yield that is ~4 bps higher. Regions Financial (NYSE:RF) was weaker than expected and last night Zion Bancorp (NASDAQ:ZION) seemed to do decently enough. Could it be that the miss by RF after a slew of strong financial earnings (vs consensus/expectations) is causing the weakness? So ya see it.
The Richmond Regional Manufacturing figure is quite bad, but it is strikingly different from the manufacturing data we've received thus far in July. Overall, it looks like activity slowed down markedly. My guess is that we'll see strong manufacturing activity continue into August before peaking before the fiscal debates that begin in October.
NYSE all-securities breadth was 1.5:1 at 10:10 this morning, with the A/D line at +433. Volume yesterday was quite low with only 583.79 million shares changing hands on the NYSE. For perspective, the July 5 quasi-vacation day saw 625.38 million shares trade and 428.04 million on July 3.
Going off the reservation a little bit here... this morning, the Turkish central bank hiked overnight rates by 5bps to 7.25% and said they have the scope to hike a lot more in an attempt to stem the mass of outflows from the country. I've been keeping a wary eye on Turkey to see what's going on and the research I have read suggests that there is another 1.5%-2% of hikes possible. This is a problem in and of itself because the Turkish yield curve is inverted from the 2yr point and out with bill rates not far behind from being inverted with any rate hikes.
Additionally, Indian yield curves are also inverted or flat from 3-month bills out to the 30-year rate. I bring this up because India has been tightening monetary conditions and draining currency reserves from the market. A -1bps spread between 3-month bill rates (8.6%) and 30-year bond rates (8.59%) is highly negative and bad for emerging markets.
Brazil is probably next with their 2-year rate at 9.83% and 9-year rates at 10.59%, narrowing from a 107bp spread a month ago.
What does all of the above mean? Either monetary conditions are too tight or the market is discounting contraction in both of these economies. As it pertains to India, it means that the Indian central bank has tightened too far - either way the country is screwed - because the capital outflows will continue at a frightening rate, which jeopardizes future growth should they start to ease. If the central bank tightens further, it will choke off further domestic growth.
I gather the hikes in Turkey and other emerging market problems are behind the alarming underperformance in TIPS over the last couple days as real rates rise. This is the second day in a row that I've noticed the outsized underperformance, which is a negative for risk taking into the near-future. Longer-term (5-year and 10-year) rates are coming down, but at a slower pace.
I have my bid out for the muni CEF I'll be looking to add to today. I'm keeping an eye on the UPS (NYSE:UPS) earnings call; I'll be back with any gleanings shortly.
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