Buzz on the Street: Gambling Stops at the Nasdaq Casino
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, August 19, 2013
Natural Gas Surgest Out of Near-Term Base Pattern
Nearby Natural Gas is up 3.2% this morning, as it claws its way to a new recovery high off of the Aug 8 spike-low-reversal at 3.129.
Let's notice that the price structure also has clawed its way firmly above the support line of its May-Aug corrective channel, which argues strongly that Natural Gas is in route towards a test of the upper-channel line, now at 3.850.
At this juncture, only a decline that breaks and sustains beneath 3.32 will compromise the upside continuation.
Click to enlarge
We've Seen This Show Before
For the past four days, we've seen a redux of the May/June deleveraging playing out again. Breakeven rates, or the spread between nominal and inflation-indexed bonds (TIPS), have been falling in the midst of falling equities and fixed income assets. This would under normal circumstances indicate that inflation expectations are falling, causing equities to fall and fixed income to rise (as less inflation is priced in). Recently it has meant that deleveraging is taking place and emerging market carry trades are being unwound. However, this time around, we have yet to see the metals move (lower).
Last time I was lucky enough to pick up on the movement in real rates while it was happening, but we didn't figure out the exact reasons until after the fact. This time around it appears that India and Brazil are the matches that set off the movements whereas China and to a lesser extent Brazil and Turkey were the prior time. I had thought that the carry trade unwind had been done, but it's either A) not done yet or B) the damage in emerging markets is a coincidence and there is another cause. Either way, there are a lot of similarities.
Both the Indian and Brazilian central bank have been intervening in the FX and repo markets daily, with only short-term success.
Saving the worst for last... India's 3M-10YR government bond spread is currently -215bps (meaning a severely inverted curve) , something that is never associated with good things. Bill rates are higher than note rates because of the decline in the rupee, which is equally from foreigners as it is the central bank. The central bank has hiked the discount rate and continues to withdraw liquidity from the system, which has done nothing to stem the bleeding. They might have better luck with a tourniquet. As an investor, paying a premium for the longer duration asset over the bills, you are betting that inflation will fall quite a lot in the future.
If all of the above is true then:
- Emerging market equities/bonds have a ways to go lower.
- Emerging market currencies will continue to collapse and the dollar will go higher.
- Metals should fall (note: I have no axe to grind here).
- US equities/bonds will fall.
- US Treasuries should tend to have a positive correlation with US equities.
Click to enlarge
Can Gold Crash Up
Scale-in buying of Gold (NYSEARCA:GLD) was suggested at the late June/early July Selling Climax. That Selling Climax mirrored the 7-week blow-off into the 2011 record high.
Now that GLD eclipsed the big initial resistance at 130 on the dailies, can it achieve a move to our primary projection to 137-143?
Last week's breakout followed a weekly Plus-One/Minus-Two buy pattern. The plus one part of the equation occurs when the 3-Week Chart turns up. This occurred 4 weeks ago for the first time, just prior to the pre-crash pivot high (both point C on the chart below).
Notable is how GLD crashed from a third lower weekly high in March 2013 and that the break of double bottoms around 150 defined the low near 115 because this was the mid-point of the range from the 2011 high to the June low.
Achieving this level confirmed the idea of a Selling Climax in addition to 115 being 540 degrees down from the 186 top.
See weekly GLD chart below from this morning’s Daily Market Report.
Click to enlarge
Tuesday, August 20, 2013
The Risk of Risk
In my most recent writings and media appearances, I've expressed concern over the way bonds have been acting and explained why spiking yields are undesirable. The parallels to 1987 in terms of the spread between the S&P 500 SPDR ETF (NYSEARCA:SPY) and iShares 20+ US Treasury ETF (NYSEARCA:TLT) are very real, with the key difference being central bank paranoia over an end to the wealth effect. The breakdown in long duration bonds over the past several days was enough for us in our mutual fund and separate accounts to rotate fully out of Emerging Markets (NYSEARCA:EEM), which up to that point we're showing some very nice strength going up on down days for the US.
That trade is far from over however. Often times following meaningful corrections, new leaders emerge. If indeed we are in the midst of a bearish environment for stocks due to the way bonds are acting, emerging markets could end up being the next big winner. From a price ratio perspective, there has been no major damage to them, with the exception of India, which may be in a capitulation phase.
If the coming Fed minutes are able to calm markets, I suspect long duration bonds and emerging market stocks stage a strong reversal. These are the trades to pay attention to for those who are debating what to go long in. Some will prefer to go short the S&P 500 (INDEXSP:.INX), but this may he a very risky strategy despite crash risks I have been highlighting. Do not underestimate the possibility that we may be in for a doozy of a correction. Also don't underestimate the Fed knowing that and acting to front run it.
Where to Buy
Yesterday’s close was cruel. I was chomping at the bit to buy and even had bids out for some positions. Today, I am repositioning those bids for a nice flush. I am particularly eyeballing the 50% retracement of this move (around 1635 on the S&P 500). If we get there, I will buy heavy against that line with stops on the other side of the 61.8% retrace. This would also give us some nice gap fills that we talked about last week. It sure feels like today could be the day, and as such, I have to keep it brief. Good luck out there my friends!
Additionally, I am loading up on iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) here. Bonds DSI reached 5% last night, which means sellers are exhausted and shorts are haughty, a great mix for a nice reflex move.
Click to enlarge
The S&P is back above the all-important 1650 level -- it is Turnaround Tuesday, after all. Given how some technical oscillators were oversold coming into today's session, this shouldn't come as a surprise, particularly in the back half of August (read: it's a thin tape).
The next technical hurdle? S&P 1658, which is the 50-day moving average, which is coming up quick.
The HFT robots seem to be pegging their equity purchases and sales on the price action in fixed-income land.
This is a fascinating CNN documentary on the risks and rewards surrounding cannabis. I missed it the first time around (when it broadcast) but I'm trying to educate myself on the implications, not just financially but socially and physically, so I'm absorbing as much as I can.
To that end, we will continue to update The Minyanville Potfolio as we educate ourselves in kind.
The bulls will offer that higher rates are part and parcel in a strengthening economy; the bears will argue that the system is so levered up and interconnected that a pebble in the pond can cause a tsunami overseas.
Our nine-year old twins recently discovered fishing and can't get enough of it. While we moved out of New York City for other reasons, I'm psyched they're digging these types of outdoorsy activities. It's a world away from the concrete jungle, and I wouldn't have it any other way, particularly with three kids.
Lemme get this to you -- and lemme get something in my belly!
Click to enlarge
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.