[12:40 pm ET Sunday] All eyes on Cyprus! Why? I don’t have a clue other than maybe it’s because of the similarities with Hitler’s army take-over of Austria in 1938 – small, defenseless and not able to put up any resistance – before the Nazi forces went on to bigger things and to hell with international law.
Trying to make sense of what’s happening in this event, I watched BNN financial-TV from Toronto, hoping to get an objective viewpoint. The reporter was interviewing someone from the American giant money manager PIMCO who proceeded to say that the whole thing would be quickly resolved and would not affect us much. After all, he said, Cyprus was (I’ll paraphrase) “one-tenth as important as Canada”.
The bloody insult! I turned the channel.
Cyprus is ranked the world’s 125th biggest economy with a GDP of about $22.5 billion. The GDP of Canada, however, is about $1.5 trillion (purchasing power parity), number 14 in the world, about 75 times bigger.
But other than dismissing Canada as a non-player (to a Canadian audience nonetheless), what was this PIMCO Oberleutnant’s message? I suppose he was telling us his boss manages over $2 trillion and the rest of us are Austrian peasants.
I don’t like what I see.
A week ago I started the WIR with these words:
This week equity market prices lifted a bit before the selling started on Friday. The few stocks that out-performed on the upside this week appear very much to me to be whip-saw set-ups. Instead of buying them, you ought to have been selling.
I added a general discussion because people need to be reminded:
Remember, you sell into strength and buy into weakness. That’s a rule the other side – the market interventionists – hate. They are the experts at pump and dump. Regrettably, 70% of you do exactly what they expect you will do. Human emotion tells you to go with the flow – you buy and sell with the crowd. Too many of you listen to the Fed’s Talking Heads and the media clowns.
This week, despite the sizeable gain on Friday, there was some selling. The S&P 500 gained +0.40% on Friday but still managed to lose -0.24% W/W. Are you feeling better because of Friday or are you watching closely?
There is one aspect of the market I find intriguing, which happens to be the US housing market. Too many people I think are confused by the great interest by investors in the Homebuilders, and I don’t understand why.
The chart shows the house builders index rising steadily for 20 months:
The point & figure chart shows an “Ascending Triple Top Breakout on March 19”:
http://stockcharts.com/def/servlet/SC.pnf?c=$DJUSHB,P
The answer lies in the mortgage rates, which have plummeted -33% since January 2011, now down to ~3.4%. The response to lower rates is clearly shown in the New Home Sales chart as follows:
In the coming week there will be three reports on US housing, the first two on Tuesday and the other on Wednesday: (i) S&P Case-Shiller HPI, (ii) New Home Sales, and (iii) Pending Home Sales Index. Along with important econ reports to come this week including Durable Goods Orders, GDP and Personal Income & Outlays, there is the start of Earnings Season.
There will be some disappointments. This week Oracle (ORCL) was one. The stock plunged -12.0%, which was a haircut to shareholders of some -$16 billion – almost the annual GDP of Cyprus.
In US equities this week, there were 5 sectors up and 5 down – thanks to Friday when all 10 were up. In fact had it not been for the gains on Friday only one sector – Consumer Staples (XLP) – would have been up. As it is, the three defensive sectors – XLP, IYH(Healthcare) and XLU (Utilities) – were the leaders. The three leaders on the downside were XLB (Basic Materials), XLF (Financials) and XLE (Energy).
Internationally, only 1 of 19 non-North American equity markets I follow was higher, and of the US Dollar denominated Country ETF’s I follow, 11 of 17 were lower. That’s a lot softer than a week ago, which happened to be softer than the week before that.
This all goes to show the equity market was selling off this week. Capital was flowing into Bonds. The 20-year US Treasury (TLT) popped +1.4% W/W.
Gold (+2.20% W/W) was strong, but Silver (-0.19% after falling -1.42% on Friday), Platinum (-0.41%) and Palladium (-1.42%) were all down. Crude Oil ($WTIC) gained +$0.42/bbl (+0.45% W/W). Copper dropped -5cts (-1.53%).
Now to the charts that I keep in front of you each WIR.
As you know, I recommend studying certain key ratio charts in capital markets to assess “the weight of the evidence” before you firmly establish a mind-set on Bull or Bear. Most of these indicators have been bullish recently.
For these studies I look at the ratio charts of:
•US Bonds ($USB) vs the US S&P 500 ($SPX)
•Global Dow Index ($GDOW) vs US 20-year Treasury Bonds (TLT)
•MSCI World Equity ex-US ($MSWORLD) vs the US S&P 500 ($SPX)
•US small cap Index ($RUT) vs the US large cap S&P 500 ($SPX)
•Canada (EWC, in USD) vs US S&P 500 (SPY)
•US Industrials (XLI) vs S&P 500 (SPY)
•Consumer Discretionary (XLY) vs Consumer Staples (XLP)
•Euro ($XEU) vs US Dollar ($USD)
•US Treasury Inflation Protected Bonds (TIP) vs US 20-yr Treasury Bonds (TLT)
•Goldminers (GDX) vs Gold Bullion ($GOLD)
•Silver Bullion ($SILVER) vs Gold Bullion ($GOLD)
•Junior Gold Miners (GDXJ) vs Senior Gold Miners (GDX)
•Oil Services Companies ($OSX) vs Integrated Oil companies ($XOI)
•Semi-Conductor Tech Companies (SMH) vs Major Tech Companies (XLK)
With these ratio charts, the good thing is that you are looking at the market speak, not the media. You can see for yourself the unfolding of relationships – i.e., what is actually happening in the market today, and from there you can study the reasons for it, such as the corporate or industry reports, the commodity prices, interest and dividend yields, impact of regulation and government policy, and so forth. Not all charts will give you a bullish or bearish picture, at least most of the time, but you take it all under consideration and go from there. There are different time frames – short, intermediate and long – and you are trying to time your entry or exit with the simultaneous reversal of all three. Also, if the big picture gets too extreme one way or the other, the trend is not likely to last in that direction and you ought to be looking for signs of a reversal.
A ratio chart, which is simply the first data series divided by the second, will show you clearly what is happening in terms of market drivers over the time period I am studying. It could be Daily, Weekly or Monthly data. As there may be a market cycle event on the way, I’ll be changing this week from a Daily to a Weekly data series to get a Big Picture view of where the market stands today.
If the line is rising, the first data series is strengthening. The S&P 500 by itself is in the solid thin orange line in the background. In the case of a Bull phase for equities, which some are calling the ‘risk on trade’, the line should be rising for the particular studies that follow, and the line should be above the 8-month Exponential Moving Average.
The following short-term Weekly data series charts show a definite change to ‘risk on’ in mid-November – a point in time when I noted that the pundits were over-the-top with their negative doom-and-gloom forecasts:
1. Weekly US S&P 500 ($SPX) vs Weekly US Bonds ($USB)—conclusion: RSI-7 has dropped below the 70-line, but the ratio at 10.805 is still above the 8-week EMA of 10.67, hence is still Bullish, so a Bullish primary case since mid-November persists. However, the chart is getting close to a Neutral reading, which some will then interpret at Bearish.
2. Weekly MSCI World Equity ex-US ($MSWORLD) vs US 20-year Treasury Bond (TLT)—conclusion: The RSI-7w failed to regain the 70-line, which is a negative, but the ratio line is still at 14.53, which is above the 8-week EMA of 14.42, so a Bullish primary case since mid-November persists. However, the chart is getting close to a Neutral reading, which some will then interpret at Bearish.
3. Weekly MSCI World Equity ex-US ($MSWORLD) vs US S&P 500 ($SPX)—conclusion: The Weekly chart has changed from Bearish to Neutral and back to Bearish. International investors have been selling while US investors are rotating through their positions, encouraged by the Dow 30 Bullishness. Econ data and the upcoming Earnings Season may change the minds of the US investors however. The next Bull run for equities will be led by gains made in the international markets, likely starting after the first week in April, pumped up by central banks.
4. Weekly US small cap Index ($RUT) vs the US large cap S&P 500 ($SPX)—conclusion: A Bullish primary case since min-November persists; however the RSI-7w at 67.24 has dropped below the important 70-line.
5. Weekly Canada (EWC, in USD) vs US S&P 500 (SPY) —conclusion: Remains sharply Bearish, which is not surprising as the Fed is pumping liquidity into the market and the Bank of Canada is not. But Canada is much oversold, which to me is indicating a possible reversal within one month and, should it happen, that would be a positive indicator for a global Bull run in equities.
6. Weekly US Industrials and Transports (XLI) vs S&P 500 (SPY)—conclusion: The Bullish primary case since mid-November has broken down. This is a Bearish chart. The leader on the downside is Fedex (FDX -9.7% W/W).
7. Weekly Consumer Discretionary (XLY) vs Consumer Staples (XLP)—conclusion: From Bullish the chart is now Bearish. The ratio line at 1.34 has fallen below the 8-week EMA (1.35) and the RSI-7w is now below 50 at 45.30.
8.Weekly Euro ($XEU) vs US Dollar ($USD)—conclusion: Extremely Bearish still, which will hold back the emergence of the next Bull run. As long as there are manufactured events like Cyprus popping up, there will be opinions from politicos that the EU is doomed and the Euro will be weakened. When these Interventionist central bankers and their Friends and Family want the global equity market to lift, they will manufacture a stronger Euro. Watch for it. I believe it will start in April, and by then these people will all be positioned in the stocks they want to hold, ready to profit from their games. This situation is precisely why there is a 1% and a 99%.
9. Weekly US Treasury Inflation Protected Bonds (TIP) vs US 20-yr Treasuries (TLT)—conclusion: The primary Bullish condition has weakened and is now Neutral, with a forward looking Bearish tone.
10. Weekly Goldminers (GDX) vs Gold Bullion ($GOLD)—conclusion: Remains sharply Bearish. But is much oversold, which to me is indicating a possible reversal during April. Needs a weaker Dollar to support a Bull run.
11. Weekly Silver Bullion ($SILVER) vs Gold Bullion ($GOLD)—conclusion: The Weekly data chart has been Bearish for about six months. I am anticipating this chart to go strongly Bullish in April, like 2H10 and 1Q2011.
12. Weekly Junior Gold Miners (GDXJ) vs Senior Gold Miners (GDX)—conclusion: From “clearly Bearish, and showing no signs it may be ready to reverse”, this chart recently reversed to a Bullish pattern on the Weekly. I believe the market is setting up for a Bull run in precious metal stocks, starting in April.
13. Weekly Oil Services Companies ($OSX) vs Integrated Oil companies ($XOI)—conclusion: Now Bullish. Risk-off clearly shows here. In absolute terms, CVX and XOM were not strong this week; but relative to the Drillers were very strong. Nabors Drilling (NBR) for example plunged -10.6% this week. With risk-on, this situation reverses. That will be the case by no later than mid-April I believe.
14. Weekly Semi-Conductor Tech Companies (SMH) vs Major Tech Companies (XLK)—conclusion: A week ago I wrote: “The primary condition has been Bullish since early October, but is threatening to go Bearish. On Friday, SMH dropped -1.72% on the day while XLK was down -0.82%. To stay Bullish, SMH next week must be relatively stronger.” This week SMH dropped -0.31% W/W while XLK was up +0.11%, so the primary trend is now Bearish.
Using the Weekly ratio chart data this week, I sum up the Bull:Bear picture as being 4 Bullish, 9 Bearish and 1 Neutral. This is the start of the reversal I called for a week ago when I interpreted these 14 charts as being 8 Bullish, 3 Bearish and 3 Neutral.
I think there will be two more weeks of Bearishness ahead, and then BAM!, the central banks will hit the liquidity switch. You’ll see that when the US Dollar sells off.
Now it’s time to look at what happened this week with the US economic reports, which, this week, were plentiful and the data was quite mixed.
For an objective presentation, here is the US summary and the headlines from the Econoday analysts:
The bottom line: he recovery continues to gain traction throughout key sectors. However, uncertainties remain—including the impact of sequestration and Europe. The Fed is keeping monetary policy loose but it is increasingly being debated how much marginal impact the Fed is having.
For this week, the econ headlines were as follows:
•The Fed holds the course on policy
•Housing starts improve in February
•Existing home sales rise as supply jumps
•FHFA home prices gain in January
•Philly Fed makes a comeback in March
•Leading indicators point to moderate momentum
… Looking Ahead: Week of March 25 through 29 — Manufacturing has shown signs of regaining strength—even in regional surveys. The durables orders report could add to that momentum. Existing home sales and FHFA home prices posted advances this past week. New home sales and Case-Shiller this week may boost confidence in the housing recovery. The impact of higher payroll taxes is still a concern and traders will be parsing the personal income report for any slippage in the consumer sector.
From recent weeks, the econ headlines were as follows:
•Retail sales show unexpected strength in February
•Business inventories recover in January after weak Q4
•Consumer sentiment dips in early March
•Industrial production jumps in February
•Empire State manufacturing remains positive in March
•Consumer price inflation spikes in February on energy costs
•Producer price inflation jumps in February
•February employment surprises on the upside
•Consumer credit in January up on student loans
•International trade deficit widens in January on oil
•ISM non-manufacturing index improves in February
•Fed’s Beige Book indicates a soft Q1
•Fed chairman’s testimony soothes markets
•Q4 GDP growth turns positive but not as much as expected
•Personal income fell on fiscal cliff effects
•Motor vehicle sales in February hold strong
•Consumer confidence and sentiment unexpectedly go up
•New home sales unexpectedly jump in January
•Pending home sales jump in January
•FHFA and Case-Shiller home prices rise further in December
•New durables orders swing back down in January
•Markit and ISM manufacturing readings still positive
Because of the track-record of independence and objectivity, I encourage you to read the Econoday reports on the US economy. If we had more time in a day, we’d also be looking at the econ data for the rest of the world – at least more of it.
As for our studies this week, we’ll first look at the detailed economic data for the week that passed and the one ahead. Then we’ll get into the market prices, and the trends and cycles of Currencies, Bonds, Equities, Commodities and Precious Metals.
One final point before we get into our weekly study of markets, when it comes to trading equities I believe that the term “stock-picking” is inadequate and misleading. Instead, since a company is not a stock – i.e., a stock is just a price — you need to be “company picking” and “market timing”. I cannot stress that more.
While pure traders might disagree, I strongly believe that investor success is a consequence of asset allocation and portfolio management as much or more than simply trading execution.
Global Economics Review
Global Report from Econoday Chief Economist Anne Picker:
The tiny island of Cyprus continues to be the focus of global investors. The financial situation there threatens to upset the relative tranquility that has permeated the Eurozone markets since mid-summer when ECB President Mario Draghi said the European Central Bank may undertake fresh unconventional measures in the future, including bond purchases through the securities market program (SMP), and would develop modalities aimed specifically at repairing the monetary policy transmission mechanism… Cyprus is the fifth and latest member of the Eurozone to seek a rescue package from the troika of the European Central Bank, the IMF and the European Union. While relatively small when compared with other countries, Cyprus is seeking €10 billion. The original bailout package included the imposition of a tax on bank deposits of all sizes specifically aimed at ensuring that investors contribute to the deal. Deposits of less than €100,000 were to be subject to a levy of 6.75%, rising to 9.9% for deposits in excess of this amount. In total, the new tax was expected to generate around €5.8 billion. The package was subsequently rejected unanimously by the Cypriot Parliament and alternative ways to raise the needed euros are being sought. Cyprus looked for a loan from Russia but it was subsequently denied. Banks in Cyprus were closed for the week to prevent a run and will be closed until Tuesday — but this too could be extended… This is the first time that savers have been threatened to be hit in this way and the move clearly raises the risk of prompting a run on banks in other financially troubled economies, notably politically gridlocked Italy and (still fiscally challenged) Spain. Any such response would increase dependency upon emergency funding from the ECB, limit the availability of much needed lending to the private sector and, by undermining still typically cautious investor sentiment, threaten the stability of the single currency itself… On Thursday, the European Central Bank turned on the pressure and announced that it will stop emergency funding to Cypriot banks on Monday if the troubled country fails to agree on a bailout program with its European partners by then. The ECB said for it to continue emergency lending thereafter, Nicosia should adhere to the bailout conditions set by the EU and the International Monetary Fund… At this writing (2:00 PM ET Friday), the Cyprus government is in hard negotiations with the Troika to reach a solution on bailout terms. Cypriot Finance Minister Michalis Sarris, who was in talks with Russian authorities for possible financial aid, left Moscow on Friday after failing to secure funding. Cyprus had offered Russia assets in return for cash. Separately, Cyprus agreed with Greece to spin off Greek branches in Cypriot banks. Cyprus agreed with Greece on a takeover of the Greek units of Cypriot banks, which ended uncertainty over the fate of those operations. Troika officials have increased the contribution demanded of Cyprus for its bailout package to €6.7 billion from €5.8 billion according to press reports. The troika wants to include a safety cushion of €900 million to reflect worsened fiscal conditions and expected capital outflows.
Econoday’s Global Perspective is written by chief economist Anne Picker.