September 18th, 2012
Adam Hewison’s Daily Technical Update, updated at 1:00 p.m. each day, provides a clear eyed into daily market activity. Hewison, a seasoned Chicago trader, and founder of MarketClub/INO.com shares his decades of trading and investing knowledge LIVE every weekday, providing insight and technical outlook, into stock indices, equities, currencies, commodities, and precious metals.
May 22nd, 2013
by Dodd Kittsley, iShares
It’s always a good idea to check in on your portfolio to make sure it’s still giving you the exposure you originally intended. But just like eating an apple a day or flossing every night, most of us tend to ignore this kind of well-intentioned advice. However, something I’m seeing in exchange traded product (ETP) flows and a chart my team put together recently made me think twice about ignoring my portfolio – especially when it comes to my emerging market holdings.
Take a look at these side-by-side charts, showing the MSCI Equity Sector Weightings from 1995-2013. One chart tracks sector weightings among emerging markets while one tracks sector weightings among developed markets.
If I asked you to label one chart for emerging markets and one for developed, could you do it? It turns out the one of the left is for EM and the one on the right is for DM. But what’s so surprising to me is that over this 18 year period, how similar the sector weightings between these two types of markets has become.
While investors often associate the emerging world with resources, these days, emerging markets are just as likely to be associated with banks. Financials make up 28% of the MSCI Emerging Markets Index, compared with a 22% combined share of energy and materials and, interestingly, a 21% financials share in developed markets.
My colleagues at the BlackRock Investment Institute recently pointed out that perhaps the label “emerging markets” has begun to outlive its use. Market correlations in EM are at their lowest level since 2006, and the disparity is growing all the time as economies and markets mature at very different speeds.
How is this playing out when it comes to flows of emerging market exchange traded products?
EM ETPs finished 2012 with a record quarter of inflows. Bumper EM equity ETP inflows of $10.9 billion in January turned into outflows in February and March. While it seemed that the tide had swiftly turned on EM stock sentiment, as I pointed out in a recent blog post, the headline outflow numbers actually belied a flurry of activity below the surface. Assets may have been leaving some of the larger EM equity ETFs, but there were still inflows occurring in some of the newer and more granular EM funds.
As the distinction between EM and DM becomes somewhat blurred, and the number of EM funds expand, we’re seeing investors seek more granular exposures to emerging markets. Depending on investment objectives, some investors are choosing to add funds that offer exposure to the less risky EM countries, while others are looking for the stronger sectors within EM.
Now, none of this is meant to imply that emerging markets are no longer risky (they are) or that they have surpassed developed markets in terms of investment stability (they have not). And we expect that broad, diversified EM equity funds will always have a place in many investors’ portfolios – particularly those who don’t have very specific views on emerging markets. But the increased interest in individual countries and other narrow EM exposures could be an interesting byproduct of the changing nature of emerging markets themselves – and a good reminder to always check your portfolio to ensure you’re getting the exposure you expect.
Sources: BlackRock, Bloomberg
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Copyright © iShares
May 22nd, 2013
For Fed watchers out there, today is one of the good days. Already, we have seen NY Fed President William Dudley make headlines when he said that it will take another three or four months before Fed policymakers will know whether or not the economy is on firm enough footing to start easing on stimulus. At 10 am, Fed Chairman Ben Bernanke will be testifying in front of a Congressional Committee on the Fed’s outlook for the economy. If that’s not enough to tide you over, at 2PM we will get the release of the FOMC minutes from the 4/30-5/1 meeting.
So far in 2013, days where the Fed has released the minutes from a prior meeting have not exactly been positive for the market. The charts below show the intraday trading of the S&P 500 on each of the days where the FOMC released the minutes from a meeting. In each chart, the red dot indicates the time when the Minutes were released (2PM).
On January 3rd, the S&P 500 erased a modest gain for the day and declined 0.38% in the last two hours of trading day. On February 2nd, the S&P 500 was already down for the day, but it fell an additional 0.72% in the last two hours of trading. Finally, on April 10th, the S&P 500 was up more than 1% when the minutes were released, and while the S&P 500 didn’t decline, the rally was stopped dead in its tracks.
In each instance, the reason for the skittishness in the equity market was related to concerns that the Fed was going to taper its bond buying program at some point in the near future. With the benefit of hindsight, though, each of those instances of concern were overblown.
Copyright © Bespoke Investment Group
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May 22nd, 2013
by Charts, Etc.
I continue to survey the market landscape, trying to get a better sense of just how much further this rally has to go. I’ve written here before that I expected a correction last month, however I obviously underestimated the magnitude of internal strength in this recent move higher, despite the many developing bearish divergences. Until a few weeks ago, I maintained a bullish outlook on the market, a stance dating back to last September. During that period, I fully detected and appreciated the impressive underlying thrust that would propel the market to new highs. But again, it’s only been during these last several weeks that I’ve increasingly observed disturbing negative divergences, many of which I’ve discussed on this blog.
I will emphasize that it’s very important to avoid getting seduced into a particular mindset at any point in time. Becoming “married” to a viewpoint and constantly seeking out confirmation of this view is a behavioral finance cardinal sin. I am always trying to poke holes in my current take on things, ever fearful that I might have missed something. That said I continue to uncover items that just serve to foster more concern.
For one, the market’s advance as per the S&P 500 appears stretched historically:
The chart above shows the 120-day rate-of-change (ROC) in the upper inset and the S&P 500 in the lower inset. The more/less 6-month ROC is just shy of 20%, a level that in the past has identified peaks in the market.
In addition, I continue to find nagging bearish divergences.
The chart above shows the relative performance of the PowerShares S&P 500 High Beta Portfolio vs. the Power Shares S&P 500 Low Volatility Portfolio (represented by the red line), with the S&P 500 appearing behind it (black line). Admittedly, the history is short given the PowerShare funds have not been in existence all that long, but you can see that when the S&P 500 rises, higher beta stocks tend to outperform lower beta stocks as represented by the rising red line. Over the last few weeks, we have indeed seen this red line surge with the S&P 500′s advance, however also note that this red line has yet to surpass its prior high achieved in February. Until the red line is able to surpass that prior high, it remains categorized as a negative divergence. You’ll see I flagged such negative divergences in the past with orange lines and they do often give a decent heads-up before overall market weakness takes hold.
Finally, I found the following chart to be very interesting, and possibly alarming.
The weekly chart in the middle shows the relative performance of the TSX Venture Index versus the TSX Composite (represented by the red line), with the S&P 500 overlaid in the background (black line). The TSX Venture Index is comprised of 500 small- and micro-cap Canadian stocks, compared to Canada’s TSX Composite which is primarily a large-cap index. The Canadian equity market in general is heavily natural resource-oriented as the country is dominated by energy and mining companies. As a result, Canada’s economic fate is very much dependent on and sensitive to the global economy.
Over time, the return of the TSX Venture/TSX Composite ratio has tended to move in tandem with the S&P 500. If anything, the red line has frequently led moves in the S&P 500 with it rising well ahead of the S&P 500 low in late 2002, peaking in 2006 before the S&P 500 peak a year later, and bottoming in late 2008 a few months before the S&P 500 low in March 2009. And yet since the start of 2012, there has developed a massive divergence between the red and black lines. Note also that in the past, when the TSI indicator and Stochastic Oscillator have registered oversold levels — as is the case now — the S&P 500 has typically been at a significant low. That does not appear to be the case this time around.
I don’t wish to overstate the relationship between the TSX Venture/TSX Composite and the S&P 500 as I’m certainly aware of what has occurred with smaller-cap mining stocks, no doubt severely depressing the relative performance of the TSX Venture Index. However, it is a relationship that has broken down completely over the last year or so and I felt it was worth mentioning, do with it what you will.
As I’ve strongly suggested of late, I remain wary and cautious about the market’s recent leg higher.
Copyright © Charts, Etc.
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May 22nd, 2013
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May 22nd, 2013
Felix Zulauf: Here Comes the Buying Climax Courtesy of Joshua M Brown, The Reformed BrokerRegular readers know I’m a huge fan of Felix Zulauf’s career as a macro investor as well as his ongoing commentary. I always look forward to his remarks in the Barron’s Roundtables and in his regular notes. …
May 22nd, 2013
Gold’s been on a wild ride. After reaching a peak of $1,920 an ounce in September 2011, gold has tumbled 28% to the current ~$1,380 level forcing John Paulson to take a 47% loss in his gold fund during the first four months of this year, according to Bloomberg.
Unlike Paulson who maintained his positions in gold, other big players like George Soros and BlackRock cut their gold ETF holdings, while Goldman Sachs issued a sell recommendation on gold right before the yellow metal plunged 13% through April 15, the biggest drop in three decades. And by looking at the futures curve (chart below), market does not seem to expect gold to come back roaring any time soon.
Chart Source: S&P Capital IQ
QEs Not Hitting the Real Economy
Historically, gold is regarded as a good inflation hedge and store of value, typically thriving in an environment of high inflation, and/or weak U.S. dollar (currency debasement). With U.S. Federal Reserve’s three rounds of QE, the never-ending debt crisis in the Eurozone, hyperinflation and dollar debasement seem inevitable and supportive of gold for the long run, right?
Theoretically, Fed’s QE and near zero fed funds rate is supposed to encourage borrowing and spending from the private sector thus injecting money into the real economy. However, theory and reality don’t always see eye to eye.
Since the 2008 financial crisis, banks have significantly tightened the credit standard and are reluctant to lend. On the other hand, corporations are making money mostly from “streamlined” headcount and structure, but instead of the intended wealth distribution effect expected by the Fed such as investing back to the economy, or increase employee pay which would in turn increase consumer spending, most corporations are hoarding cash or use profits for dividend, share buybacks, or mergers & acquisitions with limited impact on the real economy.
Copper & Oil Indicating Weak Demand
The weak demand is also reflected in part of the commodity market fundamental. WTI crude oil inventory climbed to 82-year high and copper inventory at LME hit a 10-year high in April, while Goldman Sachs cut its “near-term” outlook for commodities.
Although some have argued oil and copper have lost their significance primarily due to increasing domestic oil production, and“temporary” excess copper supply. While the abundance of domestic shale oil production may have distorted the historical supply and demand relationship, but with the U.S. becoming the world’s largest fuel exporter, the fast and furious oil inventory build is nevertheless still an indication of a weak world economy. And I can’t imagine how the “temporary” buildup of copper inventory is not a sign of weak global economic condition?
Further Reading – Oil Market Manipulation Reaches Absurd Levels
Massive QEs, Limited Inflation?
On top of the overall weak spending and demand in the private sector, most of the developed countries are undergoing some shape or form of austerity with reduced government spending. China, the growth engine of the world, is having some problems of its own. The old-fashioned massive infrastructure building QE program got China through the 2008 financial crisis, and was the main driver behind commodity prices. But Beijing can’t afford another QE due to inflation concern (plus China has probably run out of things to build). Low wage levels means China consumers can’t really pick up the spending slack, coupled with bad credit problem (i.e., NPL: Non-Performing Loans), andrecent capital flight, which had many analysts worried enough to downgrade China’s growth prospect.
The simultaneous pullback from both the private and government sectors in U.S. Europe, and China is a major factor why Fed’s massive QEs have resulted in only limited inflationary pressure and increasing signs of deflation.
Dollar and Carry Trade Kills Gold
Nonetheless, when compared with Europe, China or any other regions in the world, the U.S., seems relatively more stable, and has been able to retain the “safe haven” status despite its own debt problem. With investors pouring money into U.S. equity and bond propping up the dollar, and weak demand suppressing inflation, two of the main conditions for a strong gold price — high inflation and a weak US dollar — are basically non-existent in the current macro environment. Furthermore, there was already a bit of disconnect between gold and the other commodity prices such as copper, and oil. So eventually, gold had to come to grip with the macro reality.
Another major factor against gold right now is that gold has no yield and is out of favor with the huge yield-seeking yen carry trade crowd (borrowing yen to invest in higher yield options) since bond and equity now are offering much better returns. Unless there’s a shock to the system such as a war breaking out in the Middle East, or an eventual debt crisis in Japan when people start seeking safety, there’s not much upside momentum for gold.
Gold’s Volatility Game
For now, the prevalent view is that the Fed will slow or exit QE3, and gold is out of favor under the the current macro trend. For example, Lim Chow Kiat, the chief investment officer of the Government of Singapore Investment Corp (GIC), thinks gold still looks overpriced as the usage of gold for industrial or consumer products doesn’t quite justify the prices. GIC is one of the world’s largest sovereign wealth funds.
As long as dollar maintain its strength and inflation remains tame, gold prices most likely will see considerable volatility swinging between rumors and speculation (e.g., some central banks may need to unload some of their holdings due to debt crisis), and Asia retail buying on the dip (South China Morning Post reported that many shops in Hong Kong were running out of the precious metal for the first time in decades.)
Technically speaking, gold’s next support level should be $1,330 range with $1,320 as the major support when most physical retail buyers would rush in. If gold breaks below $1,300 hard, expect a major liquidation when even Paulson could be forced to sell and everybody piles in.
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May 22nd, 2013
On its risk appetite index, Credit Suisse views the index value of 5 as “euphoria”. And we are headed there, as markets embrace risk.
Source: Credit Suisse
This is not surprising given where credit markets are trading. As an example, the Merrill European High Yield Index average yield is now below 4.5% (4.46% to be precise). Keep in mind this is sub-investment grade debt mostly from European issuers. The yield on these bonds is now less than half what it was just a year ago.
Not much else to say here other than enjoy it while it lasts.
Copyright © SoberLook.com
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May 22nd, 2013
In the final second of trading on Friday, Anadarko Petroleum Corp. (APC) goes from a $90 stock and trades down to $.01, that is a penny a share before closing at $90.03. I am sure some buyers (computers) thought they were fortunate to pick up APC at one penny. On the contrary, the NYSE canceled trades executed below $87.56 per share.
This type of trading activity certainly weighs on investor confidence in the markets and is an issue that most certainly needs to be addressed.
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May 22nd, 2013
by Jeffrey Saut, Chief Investment Strategist, Raymond James
May 20, 2013
I had a somewhat lengthy conversation with Rich Bernstein last Friday. I have been on TV with Rich over the years, but have never really had a one-on-one talk with him. Recall that Richard Bernstein was the Chief U.S. Strategist at Merrill Lynch for years before becoming the eponymous captain of Richard Bernstein Advisors (RBA). I was speaking with Rich because I have developed an interest in a few of the funds he manages for various entities. Rich began by stating he is extremely bullish, believing we are in one of the biggest “bull markets” ever. He commented that individual investors have “selective memories” and they think things should “feel good” when the stock market is going up. That is clearly not the case now. Things don’t feel very good, which is why investors don’t understand why the equity markets are so buoyant. Rich therefore opines we are likely only in the 4th or 5th inning of this bull market and when things start to feel good, and investors return in droves, the market will be in its 8th or 9th inning. Of course. that is the historic psychological cycle of the market, as can be seen in the chart on page 3.
Turning to emerging markets (EMs), Rich is shunning them, noting that while the U.S. economy is improving, and Europe is bottoming, there are debt, currency, economic, etc. issues in most of the EMs. For example, India has the highest inflation rate of any large economy in the world and yet its Central Bank is lowering interest rates. In China, he observes a banking problem, with non-performing assets (NPAs) rising rapidly. Hence, Rich is very underweight the EMs with only a 1% exposure. He continued, “I am very bullish on U.S. domestic companies with indexes like the S&P SmallCap 600 estimated to grow at more than twice the projected rate of most EMs.” He did say his funds bought Japan last fall, which luckily was right before “quantitative easing” was announced. Like me, Rich is a big believer in the American Industrial Renaissance and noted that to his knowledge he is managing the only “pure” industrial renaissance fund in this country. Also, like me, he is a big believer in energy independence for our country by 2020. We concluded our discussion with Rich stating, “We are Beta managers, and not Alpha managers, because correct asset allocation is the key to outperformance in the markets.”
I revisit Rich Bernstein this morning because I am hosting a “conference call” with him this Thursday at 4:15 p.m. (800.369.1922) where some of the underlying themes we will discuss include: 1) U.S. labor costs are becoming more competitive; 2) Lower Energy costs, both for natural gas and gasoline, making U.S. supply and distribution chains more efficient than those in EMs; 3) The U.S. has greater political stability, including respect for the rule of law; 4) U.S. companies are already gaining market share in many cases; 5) The American Industrial Renaissance (AIR); 6) Why there could be some problems with EMs, and anything else y’all want to talk about. Worthy of mention is that the AIR theme presently comprises about 10% of the Eaton Vance Richard Bernstein Equity Strategy Fund (ERBAX/$12.95) and a commensurate proportion of the equity sleeve of the Eaton Vance Richard Bernstein All Asset Strategy Fund (EARAX/$12.16). Because RBA is a macro- and quantitative-based firm, it has invested in a basket of approximately 50 companies fitting such investment themes. As with all of the firm’s theme-based investing, no one stock dominates a theme in order to help reduce the risk of the theme to the overall fund. I suggest listening to this call because Rich is one of Wall Street’s best.
Last week I hosted another call with my friend Troy Shaver, portfolio manager of the Goldman Sachs Rising Dividend Growth Fund (GSRLX/$17.80). Like Rich and I, Troy noted the low cost of energy is the key to a resurgence of the reshoring of industrial production back to this country. Troy began the discussion with, “Ten years ago we were importing 14 million barrels of oil a day and now it’s down to 7 million. In fact, last year we surpassed Kuwait’s crude oil production.” Referencing the Bakken, Troy mentioned that only 8,000 wells have been drilled so far, but before it’s over 36,000+ wells will be drilled. Moreover, the resource we are currently drilling is only 35 inches thick, but there is another resource under that (the Three Forks Formation) that is 4,000 feet thick and is estimated to have more than 7 billion barrels of oil.
Switching gears, he stated that over the past 40 years the leading space for stock performance has come from “dividend growth” stocks, with “dividend payers” being the second best performing group. Currently, he stated the “growth dividend payers” are more cheaply valued than the “dividend payers” and noted, “McDonalds (MCD/$101.54/Market Perform) has a 10-year average dividend growth record of 29% per year.” Another name he owns from Raymond James’ research universe is EOG (EOG/$135.25/Outperform). Troy considers EOG the best integrated energy company in the world. In Troy’s view, EOG is the most efficient E&P company on the plant, it has consistently increased reserves, possesses a huge ROI, owns its own sand/water/trucks/rigs/rail cars/ hoppers/etc., and has increased its dividend for 10 years by 10%+ per year. Another name mentioned was Polaris (PII/$91.46/Strong Buy), which is the leader in all of its seven categories. Troy went on to say he currently has no Utilities or bank stocks in his fund, but does have a 20% position in master limited partnerships (MLPs), which I actually like. His “sell discipline” is if a company “cuts” its dividend, if the 10-year dividend growth rate falls below 10% per year, or if there is a fundamental change in the company’s strategic direction. His fund has a low turnover ratio of 20%, a three-year Beta of 0.7, and an upside capture ratio of 0.9%.
Speaking to the stock market, last week‘s action was no surprise, even though we are now at session 97 in the longest “buying stampede” I have ever seen. As noted, this stampede is legend, eclipsing the now second longest stampede of 53 sessions by nearly twice. Last week’s “win” lifted the S&P 500 (SPX/1667.47) by 2.07%, but the real star was the economically sensitive D-J Transportation Average (TRAN/6549.16), which gained 2.72%. Unsurprisingly, such strength left all the macro sectors higher for the week with Financials being the strongest (+3.32%). Also unsurprising, currently all of those macro sectors are way overbought. Of course in “bull moves” markets can stay overbought for a lot longer than most think. And, that’s what I believe is going to happen as I expect the SPX to trade to 1700 into the end of the quarter before a polarity flip occurs sometime in the July/August timeframe, leaving stocks susceptible to a low double-digit decline.
The call for this week: The negative nabobs that continue to call this rally just a “tactical rally” in an ongoing “secular bear” market, as they have for more than four years, should consider this. The equally weighted S&P 500 (SPXEW/2590.60) made a new all-time high in April 2011; and made another new all-time high in March of last year, and has been pointing the way higher ever since (see chart on page 3). I, like Rich Bernstein, think this “bull” has a lot further to run. I do, however, think the equity market will become vulnerable to a decent pullback in the July/August timeframe.
Copyright © Raymond James
May 21st, 2013
Upcoming US Events for Today:
- No Significant Events Scheduled
Upcoming International Events for Today:
- German PPI for April will be released at 2:00am EST. The market expects a year-over-year increase of 0.2% versus an increase of 0.4% previous.
- Great Britain CPI for April will be released at 4:30am EST. The market expects a year-over-year increase of 2.6% versus an increase of 2.8% previous. PPI Output is expected to show a year-over-year increase of 1.4% versus an increase of 2.0% previous.
- Japanese Merchandise Trade for April will be released at 7:50pm EST. The market expects -¥594.3B versus -¥362.4B previous.
Seasonal charts of companies reporting earnings today:
Sentiment on Monday, as gauged by the put-call ratio, ended bullish at 0.79.
S&P 500 Index
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
Horizons Seasonal Rotation ETF (TSX:HAC)
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- Closing NAV/Unit: $13.36 (down 0.07%)
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* performance calculated on Closing NAV/Unit as provided by custodian
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