by ilene - September 21st, 2015 10:52 pm
The "trend is your friend" until it defriends you, and you can tell when that happens by watching trendlines get tested and fail. The S&P 500 solidly broke the QE Uptrend started in October 2011. That break accompanied a 9% drawdown from earlier highs. The next defriending comes a lot lower — a test of the 2009 trendline would take the S&P 500 down to about 1700 in October.
Courtesy of Joshua M. Brown, The Reformed Broker
Think back to late 2011.
So-called “1% days” in the S&P 500 – in both directions – became commonplace. Every headline from Europe had the ability to jack e-mini S&P futures up or down to a major gap opening. Volatility was elevated for a long stretch of time and heightened correlations across stocks and sectors were breaking records.
That’s when the Federal Reserve stepped in with one of the largest stimulus schemes of all-time. An open-ended delivery of $80 billion a month going straight into the bond market and indirectly into the banking system. This QE program did several things very well:
a) drove expanded multiples on stock prices
b) ignited a historic buyback binge
c) moved a ton of investor capital flows into equity / corporate bond mutual funds
d) suppressed volatility
e) changed investor psychology toward a buy-n-hold orientation, puffing up Vanguard’s index fund AUM while giving rise to the robo-advisor industry
f) made sellers of anything look ridiculous
The dips were all automatically buyable and the drawdowns all led to v-shaped recoveries measured in days, rather than weeks toward the end. I called this the Relentless Bid Era and I was sad to see it go right around the time QE was winding down last winter.
With QE concluded at the end of 2014, stocks ended up spending most of 2015 in a sort of listless haze, with the major averages repeatedly failing at new highs. And now, a major trendline dating back to the launch of 2011’s QE announcement has been broken.
Here’s Frank Longman, CMT, of Brean Capital:
For most of us, there
by ilene - September 21st, 2015 2:25 pm
By John Mauldin
“The European Project has very little economic and political capital left to defend it if anything goes wrong now. As Mr Juncker says, the bell tolls.”
– Ambrose Evans-Pritchard
Perhaps I should issue a storm warning for this letter. Maybe it’s because I had major gum surgery on my entire lower jaw this week and am in a bit of discomfort, but as I read the news coming through my inbox, it’s not helping my mood. This week’s letter will focus on the immigration crisis in Europe – after I muse on what I think is the very disturbing aftermath of this week’s Federal Reserve meeting.
It wasn’t a shock that the Federal Reserve did not raise rates. Even the most inside of insiders said the odds were at most 50-50. Those Wall Street Journal reporters who have an “inside ear” at the Federal Reserve all indicated there would be no rate increase. The IMF and the World Bank were pounding the table, declaring that it was inappropriate to raise rates now, and although most FOMC members give lip service to the fact that Federal Reserve policy is to be based solely on domestic considerations, global concerns may well have played a role in their decision.
What surprised me was the aggressively dovish stance taken by Yellen in her press conference and in the press release. It would have been one thing to come out and say, “We’re not going to raise rates at this meeting, but conditions are getting better, so get ready,” so that the market could have a little certainty. The statement we got instead, combined with early data from the quarter, is making me rethink my entire view on the timing of an interest rate increase.
My immediate reaction upon reading the press release was almost perfectly echoed by my good friend Peter Boockvar of the Lindsey Group:
The Fed punts AGAIN on a new set of excuses, and I'm sorry to many
by ilene - September 19th, 2015 11:54 pm
Courtesy of Wade of Investing Caffeine
In Shakespeare’s tragedy Hamlet, the main character Prince Hamlet raises the existential question to himself, “To be, or not to be, that is the question?” With the recent -13% correction in the S&P 500 index, and subsequent mini-rebound, a lot of investors have also been talking to themselves and asking the fundamental question, “To test or retest, that is the question?” The inability of Fed Chairwoman dove, Janet Yellen, to increase the Federal Funds interest rate target by 0.25% after nine years only increased short-term uncertainty.
For investors playing in the stock market, uncertainty and corrections are par for the course. Howard Getson at Capitalogix recently pointed out the following.
Since 1900, on average, we’ve experienced…
- -5% market corrections: 3 timers/year.
- -10% market corrections: 1 time/ year.
- -20% market corrections: 1 time/3.5 years.
However, no market correction is the same. Sure it would be nice if, during every bull market, the pain from any -10% correction lasted a second – similar to ripping off a Band-Aid. Unfortunately, when you live through such rapid and violent corrections, as we just did, volatility tends to stick around for a while. And in many instances, any brief rebound in stock prices is met with another downdraft in prices that retests the recent lows in prices.
by ilene - September 19th, 2015 2:27 pm
With Janet Yellen virtually proclaiming that she is central banker to the world it’s time to roll out this post again.
Originally posted 12/20/14 under the headline The Central Fact – The Same Whales Rule In The Worldwide Liquidity Pool
A central tenet of my view of the markets is that there’s just one worldwide pool of liquidity, and it is ruled by the same Killer Whales operating out of a few world financial capitals. We call those whales (or sharks if you prefer) Primary Dealers. They feed in the ocean of cash pumped in by the world’s major central banks, essentially the Fed, the ECB (Europe), and the BoJ (Japan). The PBoC (China) is also playing a growing role as it integrates its financial markets with the rest of the world’s, but its system does not use Primary Dealers, per se, and its linkages to the rest of the world are more obscure. The BoE (UK) is a minnow in the sea of big fish. It swims along with them.The same banks feed at the BoE trough.
Here are the Big 3’s Big Fish. 13 big banks are the kings of the financial world. 28 others are also players who drink from one or two central bank fountains and play in the worldwide sea of liquidity.
Central banks only pretend to make policy. Once they print the money and purchase securities from the Primary Dealers (or lend the cash to them), the dealers decide what to do with it. The dealers are the real policy makers. The central banks have no control over where the cash goes once they intone “Abracadabra” (Aramaic for “I will create as has been spoken”) and magically wave the cash into existence.
With Quantitative Easing, the central banks bring the money into existence by making deposits in the Primary Dealers’ accounts at the central banks in payment for the securities the central banks purchase from the Primary Dealers, or by making loans to them. What the dealers do with the money from there is up to them, although they are loosely required to purchase government securities when the central government auctions them. Since there are always plenty of other bidders for the government paper, the Primary Dealers end up with billions
by ilene - September 18th, 2015 5:52 pm
Warhol Soup Cans at the Royal Scottish Academy, image © SixSigma / Wikimedia Commons – Source.
Courtesy of Lee Adler, The Wall Street Examiner
While everyone has been busy speculating about whether the Fed would try to raise the cost of money, we have lost sight of the most important fact.
It’s not the cost of soup that matters. Our bellies and the store shelves are so full of the stuff that Campbell’s has stopped producing. Everybody has drunk so much, they’re puking it. So what if it’s free. We’ve ingested so much, it’s making us all sick.
To the vomitorium!
I Don’t Want More Stinkin Soup!
by ilene - September 16th, 2015 8:24 pm
Watch Phil's video, recorded yesterday: Phil's Stock World's Weekly Trading Webinar – 9-15-15
(Subscribe to our YouTube channel here.)
Major Topics: S&P, TLT, Butterfly Portfolio, WMT, AMZN, NASDAQ, DOW, Russel, Nikkei, Doubling Down, AAPL, CLF, China
1:59 S&P Future index, chart review.
5:26 TLT Trade Ideas: going short. Often things that don't make sense present good trade opportunities. The Fed. Interest is too low for bonds to be a good bet.
9:20 Trade Ideas, trading futures, scaling into a position.
14:25 Butterfly Portfolio: WMT Position, Walmart as a business.
21:30 AMZN as a business. WMT and trade ideas for trading the channel, puts and calls.
35:35 S&P Futures, NASDAQ, DOW, Russel, Nikkei resistance.
44:00 Doubling Down or Taking a Loss, Review of Positions, AAPL Trade Ideas
59:32 Scaling in. Trade ideas.
1:17:49 Nothing beats AAPL, AMZN.
1:20:23 Nikkei, Futures, Volatility.
1:23:45 S&P Trade ideas, Nikkei.
1:24:17 Refugees of Syria heading off to Europe. Pressure on Europe.
1:25:30 Large rally for Independence from Spain, more economic uncertainty, danger. Reasons to go to cash.
1:26:34 Cliffs Natural Resources Inc. (CLF), CLF left China, is now in America, but trying to sell iron ore in Asia.
1:27:00 China was driving prices stupidly high. Now iron ore is stupidly low.
1:37:18 Industrial Production
1:41:55 BID Quarterly Earnings
1:43:52 Gold, RJet, IRobot, CCJ Rally
1:45:00 TASR Trade Puts and Calls
by ilene - September 14th, 2015 9:05 pm
Courtesy of Jim Quinn via The Burning Platform
In Part 1 of this article I discussed the catalyst spark which ignited this Fourth Turning and the seemingly delayed regeneracy. In Part 2 I will ponder possible Grey Champion prophet generation leaders who could arise during the regeneracy.
The nearly seven year reign of Barack Obama has resulted in furthering wealth inequality, in spite of his socialistic rhetoric. Notwithstanding his Nobel Peace Prize, military spending is at all-time highs and we are engaged in actual and proxy wars across the Middle East and in the Ukraine. Race relations have never been worse. Poverty levels have never been worse. Real median household income is lower than it was in 1989. Real hourly wages are at 50 year lows. Home ownership has plunged to 50 year lows, as middle class workers have been kicked out of their homes and young people are saddled with so much student loan debt and bleak job opportunities they will never have an opportunity to own. The ownership society pushed by Clinton and Bush, with the proliferation of Wall Street created “exotic” subprime mortgages, peddled to people incapable of paying their mortgages, blew up the world in 2008, and the fall out will last for decades.
Meanwhile, Wall Street banks have reaped $700 billion of ill-gotten profits since 2010 as the Federal Reserve has handed them trillions of interest free funds to gamble with, while rigging the financial markets, and paying their executives obscene bonuses. The hubris and arrogance of the Wall Street titans is appalling, as they buy politicians, write toothless financial regulations (Dodd Frank) for their bought off politicians to pass, report fraudulent financial results with the stamp of approval from the FASB, blatantly rig interest rate, currency, stock and commodities markets, and use deception and propaganda to distract and mislead the public through their corporate media mouthpieces – dependent upon Wall Street advertising revenue to thrive.
And still, Obama has not prosecuted one banker for the largest control fraud in world history, as he assumed the role of useful puppet to the vested financial interests. I’m sure he will be paid handsomely after he leaves office in 2017, just as Bill Clinton, Alan…
by ilene - September 13th, 2015 4:29 pm
Courtesy of Jeff Miller, Dash of Insight
After many years of standing pat on interest rates, there is finally a genuine chance of a shift in Fed policy. The punditry will be asking:
To hike, or not to hike?
Prior Theme Recap
In my last WTWA I predicted that the end of summer and market declines would create buzz about the need to change year-end market targets. That was mostly wrong, lasting for about one day! Once again there was plenty of volatility to discuss. As he does each week, Doug Short’s recap explains what happened and his great weekly snapshot lets you see it at a glance. The full article always includes several other helpful charges. (With the ever-increasing effects from foreign markets, you should also add Doug’s World Markets Weekend Update to your reading list).
The chart shows the gain for the week (over two percent), but you can readily see why it did not feel that good. Wednesday’s big gap opening turned into a 1.39% loss on the day. At least the week was good enough for the Texas boys to take over from “Markets in Turmoil” in CNBC prime time!
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.
This Week’s Theme
by ilene - September 12th, 2015 9:01 pm
Courtesy of John Rubino.
The intellectual groundwork is being laid for the next stage of the Money Bubble, and it’s going to be epic. Here are excerpts from two articles that appeared over the weekend (and which should be read in their entirety). Both deal with Japan, which went all-in on debt monetization, lost badly, and now needs a new plan.
The first is from a University of Michigan economics professor:
Japan is wasting its time trying to raise inflation.
Japan may succeed at bringing annual inflation up to 2%; indeed, it has made some real progress toward that goal. But suppose Japan succeeds in getting inflation up to 2%; would that be enough? The US economy has struggled mightily despite the fact that it went into the Great Recession with a 2% annual rate of core inflation. Japan could try to target an even higher rate of inflation, as Blanchard, Ball and Krugman recommend, or Japan could leave behind quantitative easing and higher inflation targets to make the leap to next-generation monetary policy.
The key to next-generation monetary policy is to cut interest rates directly instead of trying to supercharge a zero interest rate by raising inflation. Of course, cutting interest rates below zero pushes them into negative territory. But Switzerland, Denmark, Sweden and the euro zone have already shown that can be done. There is a widespread myth that cutting interest rates much deeper than -0.75% would inevitably cause people and firms to do an end run around those negative interest rates by taking their money out of the banking system as paper currency. Not so!
It is easy to neuter cash taken out of the bank as a way to defeat negative interest rates simply by removing the guarantee that the Bank of Japan will take that cash back at face value. This is an idea I have taken on the road that has withstood close examination and grilling by central bankers and economists all over the world. A common reaction is surprise at how easy the practical details are relative to the many much more difficult things central banks already do.
by ilene - September 11th, 2015 10:22 pm
Courtesy of John Rubino
Next week we’ll find out if the longest-ever will-they-or-won’t-they drama involving a virtually insignificant quarter-point interest rate change will amount to anything. But either way, US monetary policy is already a lot tighter than it was a year ago.
The Fed’s balance sheet, for instance, is a measure of how much new currency it is pumping into the banking system. And it’s up only $79 billion, or 1.8%, in the past year. In real terms, that’s flat to slightly negative.
Much bigger in the scheme of things is the dollar, which is up by about 20% versus most other major currencies (and a lot more versus emerging market currencies like the Brazilian real). A stronger currency makes loans harder to pay back (just as would a higher interest rate), exports harder to sell (because they’re priced in a more expensive currency) and imports correspondingly cheaper.
Bearing this out is the latest reading for US import prices, which was down a shocking 11% year-over-year in August. Part of this was the falling price of oil, but not all of it. A lot is stuff coming in from weak-currency trading partners.
Goldman Sachs calculates that the above, along with the recent volatility in stock prices, works out to three 25 basis point increases in the Fed Funds rate.
Which makes those equity market gyrations look a lot like the taper tantrums that accompanied the end of the first couple of QE programs — and led to more easing in short order. So the question becomes, can the Fed — or any other major central bank — ever again overtly tighten monetary policy, since just the hint of it seems to send the now-wildly-overleveraged speculating community into an epileptic seizure? The answer might be no, in which case 2016 will see some truly epic volatility as this notion percolates through the global financial psyche.