Shorting AUD/USD (quickie)

The Aussie dollar popped up this evening all of a sudden. Is there news? Who knows, but I'm shorting it on a lark. Tight, arbitrary stop (.905). Short-term target around .87.

GLD -- volume check

The gold market is close to embarrassing me, yet again. Still, I feel compelled to point out the lack of volume in GLD on this latest rally.



In fact, the volume oscillator shows more resemblance to the end of a correction than it does to a burgeoning rally.

On the equivolume chart below you can see a pattern of successively lower volume on each high. That often indicates a shift in trend is around the corner.



The counterargument would be that the latest rally has barely started and volume is sure to expand as soon as the momentum players come to play in the precious metals complex.

I don't know. Just seems to me that the metals are already pretty saturated with momentum oriented traders. But I guess more could come along. We'll see.

XLF:SPY ratio

The best hope for Hope now is that this ratio of financials to the broad market can hold this level and start to show some relative strength...



...as the ratio has once again tested its most critical support.



When the ratio dropped into the beginning of the year, I was inclined to give it the benefit of the doubt (I even labeled myself a "bank bug" at one point) but now I am just not so sure, especially considering the most dreadful appearance of the ratio's point and figure chart.

30 year S&P 500 average -- The return of the Search of the Day

I used to do a series called "search of the day" in which I took a search term someone used to arrive at this blog, put it in the headline and tried to provide them with the information or chart they were looking for. It was just a little public service for people searching the internet and a little experiment in search engine optimization.

But around the beginning of the year I removed the sitemeter from the blog. I'm not really sure why I did that, I musta been in a bad mood or something. Anyway, I put the sitemeter back on the other day in order to once again monitor the traffic flow at Trend & Value.

What I found is that I am still getting a large number (relative to total site traffic ) of hits from those old search-of-the-day posts. The problem is a lot of the charts are out of date, and some of the posts just weren't very good to begin with. So I am going to restart the experiment, but along the way try to add some value to the posts so regular readers don't get pissed off.

Today someone from Cincinnati arrived here via the following google query:

30 year S&P 500 average

And he got a post I wrote from way back on Groundhogs Day, 2009. The post had a 30 year candlestick chart of the S&P I got from stockcharts.

But the dude from Cincinnati may actually be looking for the average price of the index over the last 30 years. Either that or he is mistakenly using the word average when what he really means is index. But whatever, Here's a chart of the S&P 500 since 1950:



The Blue line is the monthly "typical price" (average of o/h/l/c). The black line is the 360 month (30 years) simple moving average of the typical price, currently at 699.98. Yeah, 700~ might be a good place to look for some support eventually.

Oh, and the yellow line represents the 360 month geometric mean. It's at 529.02. I include the geomean here because I'm starting to use that method of calculation a lot more for my longer-term price analysis.

I got the historical data from yahoo finance. You can download it for free and make your own charts if you're really bored.

My sentiments, exactly

Rarely do you ever find such a consensus in the market as that of last week. A consensus on sentiment of all things. Reminds me of a comic I saw recently.



Yeah, maybe the markets (meaning all the stuff I don't like) will go up more, doesn't really bother me. I just think it's funny to see sentiment related stuff plastered all over the media, mainstream or otherwise.

An old quote

60% of investing is the ability to intuitively spot a scam, whether it's in the media, a financial report or a price chart.

At the Company Store annual picnic

Eric Leeper, a professor at Indiana University, warned of a "coming era of fiscal stress" caused by the healthcare and pension costs of an ageing population that will make monetary policy harder to manage. He called for a new "fiscal science" compared to today's "alchemy" to take some politics out of tax and spending and make it work more like monetary policy.

(From CNN)

...and make it work more like monetary policy.

I can visualize the improvements already.

Returns on 30 Year T-Bond

The first chart features the total return of 30 year Treasury bonds since 1997. The second chart is the T-Bond return index relative to the total return of holding 3 month T-Bills. Data courtesy of Ryan Labs.

A quote

"Deal making should be profitable for both sides. If it isn't for one, it most assuredly won't be for the other, immediate and short term appearances to the contrary notwithstanding." -- Ivan Hoffman

How to ask for a raise

Really, everyone is laughing about this, but these days if you are going to be audacious enough to ask for a raise, yer going to have to be willing to put out. So yeah, it definitely makes sense to have some of those cleansing cloths in yer bag for quick freshness.

"Today, it's about your worth to the company."

Plan B2

A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC. Conceivably, such a step might make sense in a situation in which a prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations. Also, in such a situation, higher inflation for a time, by compensating for the prior period of deflation, could help return the price level to what was expected by people who signed long-term contracts, such as debt contracts, before the deflation began.

See this is why Ben has gotten to the place he is today, he's always thinking ahead.

"Let's skull fuck the debtor class for a few years. Then, right as the country is on the brink of revolution, we'll switch it into hyper. Dude, I'm telling you, the People will love us."

"Long Bond Lolitas"

Jesse's Café Américain: US Bond: Our Hearts Belong to Big Daddy:

As crowded trades go this flight to safety into the long end of the curve and the 30 Year Bond, nicknamed Big Daddy by the bond traders, is about as jammed up as it gets.

The crowded trade was trying to short Treasurys six or nine months ago. Much of the recent move has simply been short covering by all those idiots. (I do not use the word loosely around here, but there is no other word for those people than idiots.)

For this move the short covering is about over. The next phase will be a driven by speculative longs. A short covering climax usually entails a sharp retracement, obviously, but I'm not sure if we're quite at that point yet.

Treasurys = HOLD (no change)

A little perspective on the Bimetallic Ratio

SLV -- classic topping pattern

I shall let you know whether I'm eating steak or crow in a few days.

Hussman on QE and USD collapse

Hussman Funds - Weekly Market Comment: Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar - August 23, 2010

A few quick points:

1) Versus the euro, the dollar is already undervalued PPP-wise.

2) 10 year Treasurys currently yield more than the euro benchmark (Bunds).

3) Hussman's argument completely ignores the potential for quantitative easing by other central banks (such as the ECB).

For all the high-brow theory in Hussman's piece, he still commits the fallacy typical of vulgar dollar bears, which is to only look on one side of the equation.

Quote of the day

“It’s absolutely nuts to lose 5,000 people, have 31,000 injured, and spend a trillion dollars, and you didn’t even get the oil,” says Decrepit Oil Tycoon T. Boone Pickens.

I haven't linked to IOZ in a while...

...but this is simply the best polemic I have read in quite a time:

Tuesday, August 24, 2010

Nancy Lugosi

An excerpt:

It is not a tea-party protest that is bombing Afghanistan, Pakistan, Somalia, Yemen, and who knows where else. It is not a conservative government that is trying a child soldier for war crimes in a secret trial. Ad infinitum. The popular sentiments shouted at "Ground Zero" are uncomfortable, but they aren't killing Muslims; they are, however, distracting everyone from the bankrupt American military project of killing Muslims. Their superficial anger at Islam is insignificant compared to Barack Obama's real and actual policies toward Islam, which is to bomb the living shit out of it every day.

Seriously, read the whole thing. click here.

Canadian bank index

An equal-weight index of the five banks shown in the last post.

Since 2002:

Canadian banks (just some charts)

Yeah, Canada is nice. Kinda like Minnesota nice.

New trade update

The trade isn't so new any more, but I've yet to come up with a catchy name for it, so let's just keep calling it the 'new trade.'



As you can see, it's done pretty much nothing since the last time I mentioned it. But the pattern that has been forming continues to look tolerable, so I'll stay with it. Remember the trade is long dollar and nippy, while short CAD, AUD, NOK, gold and silver.

I have a knack for designing trades that keep at break-even for months and months at a time. I hope this isn't one of those.

SPY:$CASHUS

The performance of this ratio should approximate the returns of an index investor versus holding money in the bank or money market fund. Is there a fifth wave in the works? I've been pulling up this chart every few days for the past month or two. I suppose I ponder too much.

If we do enter another bear market, I doubt it will be fast and furious. It could take two or three years - at least - to hit bottom. Think of a world without panic. All despair, but no panic.

Treasury Index -- target update

In a T&V letter dated March 1, I gave a target of ~180 on the benchmark Dow Jones CBOT Treasury Index and included a chart showing how the index would approach that level. I just found that same chart in one of my chart books. Here it is:



I've never been that great at "timing" markets, but while the squiggles I outlined don't match up perfectly with the actual turns in the index, the general direction of the Treasury market has been encouraging, so far.

Yeah, I was planning to write a big piece on the bond market, but poking around the Net I see that the rhetoric (from both sides) has heated up significantly of late. So I just don't see much point in entering the fray here. Oh, hell, one comment won't hurt.

Are bonds in a bubble? Fuckin' right they are, and had you been reading this site in summer/fall of 2008 you'da been hip to the bubble a hell of a lot earlier than everyone else.

But the Bond Bubble is nowhere close to a top. When the 10 Year is yielding like .007 then we'll start looking for a top in bond/note prices.

And as you can see from the chart above, we are only about halfway through the current rally. But there should be at least one decent interim correction before we hit the target.

But I am not recommending people jump into long positions right now. We don't chase things here, remember?

Treasurys = HOLD

The Super-Flation Composite Index

Some say "inflation" is all about the money supply. Others insist it's a credit phenomenon. Then there's the establishment conception that equates inflation to the price of goods. And of course there is my personal preference to view inflation as a function of wages and income.

Here at Trend & Value we'll spare you the ridiculous debate on the definition of a word. Instead we'll just assume that each of the definitions mentioned above are partially correct. With such an assumption we can create a consolidated index that shows total inflation (or the lack thereof) over time.

Our Super-Flation Composite Index is the geometric average of the following 20 economic indicators available at the St. Louis Fed "FRED" site:

prices:

PPIIDC
PPILFE
PPIACO
CPIAUCNS
CPILFENS

money supplies:

M1NS
IMFNS
RMFNS
SAVINGNS
STDNS

credits:

NONREVNS
TOTALNS
REVOLNS
USGSEC
BUSLOANS

wages/income:

AHETPI
AHECONS
AHEMAN
PI
DSPI

Here's a chart of the index with a base value of 100 in 1974:



The next chart shows the annual percentage change of the index (AKA, "the inflation rate").



Wow, "the inflation rate" has been below zero (<0) for 11 months now. There's a word for that, I think.

Update: The spreadsheet now available on google docs. click here.

Remember the Wonder Dogs?

After things took a dive back in May I was willing to give the stock market a chance for decent rebound, and some stuff really did take a bounce. But, you know, we're getting late in the pumping season, and I'm just not comfortable being even moderately positive on equities at this point. Besides, about all of them markets below look ready to take a crap.

Just a copy and paste of something I wrote in January

In preparation to write an article on the Treasurys market (coming this week) I decided to review some of my previous analysis. Rereading the 1/12/10 issue of my defunct newsletter, I figure I might just paste the whole thing onto the blog. It's below, if you want to read it. All the words are here, but I didn't include the charts

Trend
&
Value

January 12, 2010

1. US Dollar

First I want to acknowledge my poor timing on the dollar. In the email I sent Friday morning I anticipated a near-term breakout for the index, but a few hours later the index decides to break down instead. So, of course, I could not have been more wrong. Now I've made my share of bad calls, to be sure, but I don't remember ever being contradicted by the market that quickly.

With that out of the way, let's look at the dollar index again. Sometimes I should heed my own indicators more. One of my favorite momentum indicators is the relative position of a simple moving average to an exponential moving average, when both averages are set at the same number of periods. For shorter-term trends I often use a 21 day period. This works reasonably well, though not nearly as well as a 21/21 on a weekly chart, which I use to identify longer-term shifts in momentum.

The idea with this is pretty simple, and I'm sure I've explained it before, but here it is again: In a strong up-trend, the 21 EMA will be positioned above the SMA, because the EMA takes more account of recent prices than the SMA does. As a trend matures the SMA tends to catch up to the EMA, eventually crossing above it. This crossover is the signal that momentum is no longer with the advance. Strictly speaking it is not a sell signal, because as often as not the upward advance will start again, usually after a period of consolidation. The crossover should only be regarded as a sell signal when you already have a good idea that there will be a tradable move to the downside. If you use the indicator in isolation it is just as likely to generate whipsaws as profitable trades.

This 21/21 thing could very easily be made into a panel indicator like the popular MACD (if you pronounce that 'Mac Dee' in my presence I'm liable to slap you upside the head) but the major advantage of the indicator is that is part of the price chart itself. Looking at a bunch of different panels is a major distraction, in my opinion.

Anyway, with the dollar I acknowledged the potentially bearish cross of the 21 SMA over the 21 EMA, but dismissed it. I suppose the better way to have handled the situation would have been to consider the crossover as a warning sign that could be dismissed, but dismissed only after the index broke out to the upside. I jumped the gun, in other words.

But, despite the setback the past few days, I am quite certain that the US dollar is the currency to be in this year, and perhaps beyond. That is not to say that we turn a blind eye to its shortcomings, but let's be real, most of the scenarios are widespread by now and the currency is where it is.

A year ago, it was common knowledge that the Australian dollar was going to implode because of Something Really Bad that was to happen to the economy down under. I don't remember the exact theory but it had something to do with the Current Account. Or was it the capital one? Whatever, all I know is that while all this concern was being expressed AUD was selling for peanuts at the same time its major imports, petroleum and cars, were depressed in price. Meanwhile all the stuff getting shipped out of the country was down in price too, but not as much as the imports. So I'm like, wow, looks like the trade balance will move into surplus or at least the prevailing deficit will diminish. Sure, all the capital could decide to catch a flight out the country, but it just wasn't clear to me what made Australia's problems so much more dire than other countries.

A few years ago the Japanese yen was getting beat up. Everybody thought the currency could slide forever because its low interest rates had everybody borrowing JPY and buying higher yielding stuff, like GBP, AUD, NZD, MBS, whatever. Hey, for a time I was one of those calling for the nippy's demise. But eventually the yen stopped dropping. Well, not Everybody, many intelligent observers were aware of the carry-trade bubble at the time and called for a major rebound in the yen. But the bearish scenarios for the yen were well known.

About a decade ago, the euro was in a tight spot. People, intelligent ones at that, didn't think the currency would survive birth. So the currency sold lower. Eventually the euro stopped dropping, and before too long people stopped worrying about its viability.

My point is that these currency problems never seem to last forever. Seasons change, priorities change, prices change. If you are betting against the dollar right now you are essentially betting against the viability of the United States as a country. I mean, if the country collapses then yeah, sure, you'll wanna be short the dollar. But I just don't think that is the reality right now. Not for this set anyway.

Otherwise all you have pushing the dollar lower is a crowd of US based investors chasing foreign stocks and shit, and pretending they are 'putting on a carrytrade.' Like there is any actual carry trading going on. I doubt many players are holding on to any of this stuff long enough to earn a meaningful amount on the yield differentials. People are just out for the capital gains, the carry, where there even is any, is just a talking point.

I still maintain that the real, true carry trade is, and will be in Treasury debt. I'll get to that in the next section, but first I should explain the chart on the first page a little more. Heck, here it is again, so you don't have to flip back to the front page.

The horizontal lines are the full Fibonacci, Middle, and Padovan price retracements for the advance from 74.23 to 78.45. The diagonal lines are the speedlines based off of each proportion. I make these by drawing a vertical line (not shown) down from the top candle, and then drawing diagonal lines from the bottom candle, intersecting the price retracement lines and extending across the chart. I guess you could consider the speedlines hypothetical trendlines.

These are especially useful coming off a major bottom or top where there was no prior trendline to draw. I've taken to using all three of the main ratios as a way to anticipate a general area of support or resistance. Pinpointing precise price points is always a blast, but realistically our goal should be to identify a zone in which the correction will stop. It is normal for a market to drop into this zone before advancing again. If prices drop below the bottom of the zone, (we can call it a beacon, I guess) then we need to question whether the move was just a retrace or the beginning of a renewed bear market.

It happens that on this dollar chart the lower part of the beacon coincides with the current track of the 49 day moving average, which I suggested as a fallback support a couple weeks ago, even though at the time was looking for the dollar to move higher before testing the average. So, while I am eying a low for the dollar index 'any time now' if we don't get the turn around right away the lower portion of the beacon should be our next line of defense. Certainly I'll get frustrated if the the dollar doesn't hold around 76.

2. Treasurys

The correlation of Treasury notes and bonds to the dollar's movement has been practically inverse recently. It is not always like this, but it should be clear to everyone the fortune of the dollar in the currency markets and the fortune of the Treasury securities do not go hand in hand. Sure, buying Treasurys outright is one way to bet on the dollar, just as buying US stocks is in a sense a bet on the dollar. But from a speculative perspective you can (potentially) make money in bonds even if the dollar drops. This is the carry trade that I recommend you consider.

Thanks to ZIRP, Treasury futures are in substantial backwardation. Even if there is no movement higher in the cash market for bonds, you can make at least 3 or 4 percent a year holding futures contracts and rolling them over. That may not sound like much, but you have no foreign currency risk, no risk of default, and the opportunity to hold the position on leverage. That's where the carry trade comes in. turn 4 percent into 40 percent. As long as short-term interest rates stay low you can make a substantial return.

Oh, but of course if bond prices drop too much you could get a margin call, so the best time to try something like this is when prices aren't going to drop any further. I think there is a good possibility that we have seen most of the weakness in notes and bonds, but I could never say with certainty that this is the bottom.
While the Treasury index did drop below the 200 day moving average, it has held the 351 day, which served as support last summer.

Oh, and we're holding the .618 speedline too.

Yep, it's been a slow road for T-bulls, but so far this just looks like an acceptable correction within the primary advance that started last summer. If I had any real money (I don't because I'm a slacker who hasn't had a real job in well over two years) I would be establishing a good long position in bond futures right now. It's tentative, but my sense is that we could be making a major low. You'd want to have an exit strategy, in the event this support level doesn't hold, but Treasurys are a very under-appreciated speculation right now, and the gains for someone able to buy at the lower part of the trend, and then hold could be substantial. For those with less patience than it takes to run an effective carry trade operation, you might want to buy now and then sell when I start to get antsy about the price again. If I remember, I anticipated the last two major pullbacks. It's just the extent of the pullbacks that are hard to see ahead of time.

In the past I have suggested that another good way to play the bonds market is to short TBT, the double bearish T-Bond ETF. An outright short is still a good idea, in my estimation. You get a little of the carry trade benefit combined with the price erosion inherent in a leveraged ETF. As you can see from the chart on the next page, TBT is down 27 percent since it came out about a year and a half ago, while the 30 year bond is actually yielding a little more than it was at that time. Bond prices would have to drop substantially for someone to make money holding a long position in TBT.

But considering this price erosion over time, another trade suggestion I have is to sell call options on TBT. Yes, sell naked calls. Here you are betting not so much that bond prices will rise, but more that they won't go down, at least not much.
People are paying over $3.50 for at the money calls expiring in June. So not only are people willing to buy a product that will automatically lose like 7 or 10 percent (I don't know what the exact math is, that's not my department) in the next half year due to erosion factors, but someone is willing to pay a 7 percent premium to buy an at the money call for this privilege.

So that's an idea to evaluate if you don't think longer-term interest rates are going to rise. I know, everyone is saying interest rates are going up up up up. Eh, I just don't see it. Too much money to be made with rates where they are and lower.

To wrap up, I see the stock market as dangerously overbought now (see last couple posts on the blog, where I highlight some figures) with a decent reaction due 'any time now.' Commodities for the most part look tired, though I'll need to take a much closer look before I make any definitive statements. And gold I still think to be vulnerable, but we are really at the top end of the zone I had mind for a retracement, so naturally I am getting kind of nervous. The static Foreign Blend ETF basket we examined last week closed at 7386.5 yesterday. 7386 was one of the two main price targets I identified. It might just be a stop along the way to a higher number, but I still get a kick out of seeing a market hit exactly the price I wrote down.

Oh, and the triangle setup on the GDX:GLD ratio is still in play so far. Chart below.

Regards,

Kyle

(oh and I almost forgot that I pasted a
chart of the General Liquidity Index at
the top of the front page. Still
looking for it to back down to the
1020s. But if this is a top, they might
be able to keep it spinning a couple
more sessions. Who knows...)

[T]hat proverbial tube of toothpaste

Sure, I had not the privilege to attend Harvard, like Mr D.A. Love, ESQ, but before today I was never aware that toothpaste was ever the subject of a proverb.

He apologized and later stood by his statement, but it's the type of thing you just can't take back. Not unlike that proverbial tube of toothpaste, you just can't put it back in.

Rereading this, I keep wondering where one is supposed to put it (the tube?) back in to. The medicine cabinet? The box it came in? Seems more like a riddle than a proverb.

I searched for toothpaste+proverb, and the first hit was for for this craft project for Christian housewifes:

Words are like a tube of toothpaste. If used the right way, toothpaste helps clean our teeth and keep our mouth healthy. Words are the same way. If we use our words to cheer someone up and say nice, helpful things, our words can bring joy (health) to another person.

Sometimes we can get sloppy with our toothpaste. It can leak all over the cap and make an annoying mess. Same with our words.

It's all about Proverbs 12:18,

There is that speaketh rashly like the piercings of a sword; But the tongue of the wise is health.

I like it, "tongue of the wise." Healthy tongue, healthy teeth, I'm starting to see the connection. But I'm still not sure back into where I'm supposed to put the tube of toothpaste.

TBT

I am going to write more analysis on the Treasurys market in the coming days, but first I have a question for former subscribers to my former newsletter. Did anybody take my suggestion in 2009/early 2010 to short this laughing stock of an ETF? I even recommended selling naked calls on TBT, did anyone do that? Just curious.

Underrated despot gives overrated model a rock, according to forgotten actress

Now we are just waiting for Sean Penn to chime in on the matter.

Comex gold commercial net-short position as a percentage of total open interest

Chart goes back to the start of 2005.



Talk to me when this drops to near 20 per cent.

EOG

EOG has decided to market its Canadian shallow natural gas assets in 2010. EOG began marketing these assets in July 2010 with the anticipation of receiving bids in September 2010. If an acceptable bid is received, EOG expects to close the transaction during the fourth quarter of 2010.

-- From EOG's quarterly report.

Seems like all the North American operators these days are trying to minimize exposure to natural gas. Gas is so out of style you see.

Anyone know of any companies buying up gas assets like this? Sounds like an interesting contrarian opportunity.

Dollar index (traded weighted)

If that script plays out at all, I might have to take a trip to Europe next year. Haven't been on the Continent since the last time the dollar index was well above 100. That was right after 9/11 actually, which was kinda cool, but I imagine next year in Europe will be even cooler.

Moslems are gonna buy up like the entire Continent and turn all the cathedrals they buy for pfennig into brothels. Is there an Arabic term for 'Reconquista'?

Why yes! الاسترداد -- al-ʼIstirdād

Gold PM Fix -- CDMA and CROC

Gold hits its Consolidated Daily Moving Average (CDMA)* again and gets a bounce.



Gold's Consolidated Rate of Change (CROC)** has dropped below the trendline I had pointed out recently.



I don't have much commentary for you, just thought I'd post a couple charts I got my eyes on.


---

*CDMA is simply the average of several different simple moving averages (21, 28...465).

**CROC is just the (geometric) average of a bunch of individual rates of change (21, 28...465).