Things that Make me Cry

I saw this photo on the Chive yesterday morning and it made me feel so incredibly sad although I wasn’t sure why. It took sometime before it finally hit me, but in my world only a few things will make me cry:

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A.) Getting hit in the nadgers
B.) Saving Private Ryan
C.) Indiana Jones with a freaking cell phone clipped to his waist like some old man.

Indiana Jones is old and it’s not right. The only thing that should be clipped to Harrison Ford’s belt is a blaster, a whip, or whatever. Not a cell phone so he can call his wife to find out what they need at the market.  On the plus side, we now can be sure that Decker wasn’t a replicant (check out Blade Runner, should be free on Netflix or Amazon Prime.)

FInding out that your heroes, like you, are just men and getting older is a sad moment.  Although not as bad as getting kicked in the nadgers.

Conspiracy Theories and Bigger Suckers

Since I last posted on Sunday night, the market has taken the path of least resistance and continued its drift higher to 2000, but what’s been interesting to note has been the continued out performance of mid and small cap names. Now we can get into a long discussion involving any of the following to explain why they’re outperforming like:

  1. Higher beta – higher return
  2. Playing catch up following period of underperformance
  3. People levering up their operating leverage expecting the economy to take off

And I’m sure these are all at least somewhat right, but hey, they’re also really boring. So let’s go all conspiracy theory on this one although not to the extremes of my colleagues at Zero Hedge. BTW, I love Zero Hedge so I’d encourage all of you to check it out.

In my former life, one of my bigger competitors was Good Harbor Financial and I do mean bigger. In the alternative or tactical market, they have quickly risen to become a multibillion dollar shop on the premise of offering strategies that seek to enhance returns in up markets with reduced volatility while protecting capital in down markets. Sound familiar? It should because it’s exactly what EVERY FIRM in that segment of the business is trying to do.  Or every firm that’s charging a fee anyway. There are a variety of means for investing with them, but there are two mutual fund’s publicly available on a number of platforms including Fidelity, Pershing, Schwab etc. For us,  tt’s the Good Harbor Tactical Core US Core or GHUAX.

All well and good and while it’s human to hate the successes of your rivals, whats been interesting to note is how their growth in assets has begun to shift trade patterns in the market. From what I understand, Good Harbor uses a quantitative method to rotate between “risky” and “risk-less” assets and will employ leverage in it’s strategies, all of which is disclosed up front so good for them (they are scrupulously honest which I do have a lot of respect for.) They also trade on a calendar system, generally the first of the month with the option for a mid-month trade and as they’ve grown in size, their market impact has changed accordingly, so much so that even the WSJ has made note of if it several times and that traders are now waiting and trading around Good Harbor trades to put on new positions (more here.) And here’s why:

This is a chart of UWM, the Ultra Russell 2000 ETF and one of Good Harbor’s preferred vehicles for when it chooses to go long equities.  If you look at the volume on the bottom of the chart, there is a massive volume spike on certain days which coincide with known trade days for Good Harbor.  Once you have that, it’s relatively easy to spot their trades into other products such as IWM, or UST.  Using this chart, what also becomes immediately apparent?  Largely that GH transactions do a perfect job of capturing the turning points in the market.

GH1So why do I bring this up now?  We can have a long-winded discussion of mechanical trade systems or concave/versus convex trade strategies but let’s keep it simple for now.  What’s coming up soon?  Yep, a new month and since Good Harbor didn’t appear to make a mid-August trade, there could be a doozy of a ticket coming up in the next few days.  Take a look at this YTD chart of IWM.  You can see some long bars on days when Good Harbor goes long equity and then shift your focus to last week with IWM holding the 50 day at $115.  If you think a reallocation could push it to $120 and you’re sitting on strong support…what’s the real risk of going long IWM?  Wait for Good Harbor to not just come into the market but to BECOME THE MARKET and either sell to them or wait a few days and then blow-out of your position.  Good Harbor is providing liquidity and taking whatever price the market is willing to offer; what’s the downside risk to you? 

I’m sure there are more than a few lessons to be gleaned from the story of Good Harbor, like understand what you’re buying, size does matter, etc.  Take a look at what happens when your system begins to break down (and why you should always have a place for human learning in your system. gh3I can tell you that trying to overcome a 2200 bps spread to the S&P 500 is a herculean task.

While I’m sure there are other lessons to be learned, you’ll have to get there on your own.  Time to get my day started and the garden won’t weed itself.

Sunday Recap – Zzzzzzzzz

This week’s recap is going to be shorter than most, partly because I think no one really needs huge tables full of data and because I’m feeling very frustrated. The goal had been to convert the weekly recap into a one sheet download you could use to help get the week started on the right foot but after discovering that Scribus is a lot harder to use than I anticipated, we’re going back to the old format for at least one more week. I used to be pretty handy with Pagemaker, but that was about four jobs and close to a decade ago. Getting old sucks.

Last week continued the August 8th rally and has us knocking on the door of 2000 for the S&P 500. Keeping it to the highlight reel, the chart below shows the action was clearly in favor of domestic midcaps as anything with even of whiff of foreign exposure was left in the dust. Fears over Russian invasion helped lift RSX to a positive week as value investors, bottom feeders or some combination of the two came to bite while developed Europe/Asia lagged.  I personally am looking forward to the coming lynching of all economists in Europe after their disastrous experiment in fiscal austerity DURING a recession.  Assuming they can remove their collective heads from their a$#es, equity returns could be higher going forward.  China continues to consolidate after a strong three months.

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So what happened? Janet Yellen said absolutely nothing that she hasn’t said before and the market loved it. Remember, the FED is still tightening and talking about accelerating their time frame, but for this immediate moment, the market couldn’t care less. Even TLT rallied on the news to close at the high of day and recover some lost ground on Thursday and Friday. And war in the Middle East? Tell us something we didn’t already know.

For those trying to play a particular tilt with domestic stocks, Midcaps clearly outperformed last week and with a slight growth slant. As you can see, there’s a clear distinction between the leaders and laggards among domestic sectors last week…something about the last shall be first comes to mind. The blue bars represent the weekly return (LHS) while the red line (RHS) indicates the percentage of the YTD return that has come over the last 3 months.

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Tech stocks continue to pound higher as Apple drags the rest along kicking and screaming. Consumer discretionary has come from the dead zone to positive YTD while early favorites like real estate and utilities languish. Utilities have in fact run up against their 50 days MA and need help pushing higher from here…right into the possible right shoulder we discussed last week.

So what happens next? Probably nothing exciting. It’s a busy week with durable goods, consumer confidence, personal income and a host of other things that no one will pay attention to five minutes after it’s released.  Between back-to-school shopping and Labor Day, people are distracted so this week might be more of the same with a smaller advance.  Tech stocks (using XLK as a proxy) are a point where momentum usually tends to reverse itself, while utilities and energy stocks are stuck in irons and looking for something to give them a push one way or the other. In fact, the week could be shaping up to be boring unless some Russian conscript decides to fire off a few rounds in the wrong direction.

And if you really want excitement, check out Carl Richards latest post on why that’s probably a terrible idea.

Life as a Romeo and the Best Diner in the Burgh

So I was out most of last week visiting the family back home and was asked by a relative, “what’s it like being a Romeo?” Well, I am handsome but never chased after underage girls or tried to commit suicide over lost loves. My only heartache has been over the long hours spent at Ralph Wilson cheering for the Bills. Turns out I was wrong, she meant that I had moved into a new phase of my life; ”Romeo or Retired Old Man Eating Out.” You know those guys; the ones you see at the neighborhood coffee shop or corner market, where they sit all morning swapping stories and reliving their youth while refusing to vacate a booth in the middle of rush hour. At first, I was a little taken back, but once you get past the initial shock, is being a Romeo all that bad?

I’m not just talking about the joys of shopping in uncrowded stores or matinee movies, but having the time to think about what motivates you and explore new passions you never thought of before. Hasn’t there always been someplace you wanted to go but never had the time? Or a charity you wanted to volunteer for? For me, it’s been trying to put my passion for the markets into words and find new ways to approach and understand it. It took me a while to shake off the conceptions I had from my last position, but now I’m beginning to approach everything with an attitude of no pre-stated aims or morals. Remember what Frank Herbert said, “Knowledge gets in the way of learning. All learning begins with the simple statement, “I do not know.” By making assumptions about what you know and demanding the world become stationary to that knowledge, you deny the ability to learn, change and grow.

I knew that if I kept going the way I was going, I’d eventually burn out and probably take a serious trip into bad decision making village, where you wind up working at a B&N because you like the lack of responsibility or getting a master’s degree in ancient Egyptian fiction.  Which is not a thing I discovered..along with running away to join the “Nightwatch.”  Dream’s ruined.

And for all of those who travel to Pittsburgh, I have a new restaurant for you. Everyone raves about Pamela’s, but I wouldn’t know because of what I call the “jersey syndrome” where everyone continues to swamp one restaurant largely because that’s where the longest line is. Here’s an example of this; picture a small line outside a bakery in the city (I’m from NY so the city is always Manhattan but use your imagination.) If there were true Jersey people around, they’d all go “hey, there must be something cool going on here, let’s check it out.” They could seriously be handing out donuts made from soylent green and Snooki and the situation would eat them up like, well donuts. Same concept applies to the hometown favorite at Pamela’s. I’ve tried going to the downtown location at least three times but have never been able to eat there because of the long lines.

So forget that and head over to Robinson to check out the Central Grill and Diner. Great hours, great menu and fantastic service. Today I had a waffle that was so delicious that angels would have cried and Juliet would have woken up from the dead just to try their huevos rancheros. Close to the major shops in Robinson or the airport if you’re coming into town or looking for a great pit stop before leaving the Burgh. Best of all, no sweating in a long line while everyone talks about how great the pancakes are. Come by sometime and join me in the corner with the rest of the romeo’s.

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Welcome to the Danger Zone

Loyal Readers:
Sorry to take so long to putting up another post, but I was busy enjoying some quality time with the homefolks back in the Adirondacks and discovering new delicacies like shrimp, stuffed with sausage and wrapped in bacon. Now it’s time to get back to business (and the diet) and lets start by picking up with where we left off with utilities. One thing that helps distinguish the Yinzer Analyst from other blogs; we go back and revisit past posts to see what we can learn. What did we get right and more importantly, where did we spectacularly fail?

Short Term Investors:
For those playing the short term trade I have only one thing to say:

post-33680-Archer-Danger-Zone-meme-Seriou-tUYl

 

 

 

 

 

 

 

Check out the updated chart from Stockcharts.com to start with. XLU has risen above the upper bound of the potential descending triangle and just poked its head over the 50 day simple moving average. Now it’s time to show if it has what it takes to move higher from here.

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Intermediate/Long Term Investors:
For those with an eye on more than a few days all I have to say is this…welcome to the Danger Zone! Buyers came back into the market following the dragon fly doji but as you would suspect, the volume has been distinctly weaker as the selling pressure abates so I’m taking a wait and see approach as we head towards a potential right shoulder.

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And for those more interested in playing hot sectors, XLU still has yet to break out of its downtrend pattern, in fact it’s more or less at the same level as it was when we last posted on it on August 11th as the S&P 500 has returned 2.61% while XLU has returned 2.36%.

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While it’s always tempting to play a hunch and take a chance on a bigger payout, until XLU shows that it has the momentum on its side, you’re buying beta and not alpha. And remember, if the broader market pulls back here xlu can gain momentum against spy by simply losing less. Always keep your eyes on the short and intermediate term trends.

A Shocking Turn of Events in Utilities?

I know, the title along makes you want to hit the eject button, but bear with me. The strong move on Friday that helped lift equities into the black for the week was especially powerful for the more downtrodden sectors including utilities along with fellow momentum play energy and more cyclically inclined industrials. Why the big push in the utilities?

For the more technically oriented, XLU found support close to its 200 day simple moving average, nearly glancing off on heavy volume for a bounce higher to end the week nearly unchanged. Breadth and momentum in the sector also reached new short-term lows on Wednesday with XLU having exactly ZERO holdings above their 50 day moving averages. From a momentum point of view, on Wednesday the short term momentum score for the last year was at the 0.00 percentile and longer-term scores over the last five years ranged from 1st percentile to the 4th percentile. By the end of the big rally on Friday, this number of components above their 50 day MA has risen to 3 (out of 30) while momentum scores were nearly out of the lower quartile. Given the strong move, where can we go from here?

On a short-term basis, XLU has managed to pull itself out of oversold status and could be bouncing its way higher as the selling pressure eases. After the heavy distribution over the first half of the week as anyone who still had profits decided to take them while they could, it’s not surprising that new buyers emerged hoping that momentum would be reignited. But moves off a 200 day moving average are tricky. How much of the move comes from the risk-on trade as equities in general begin to move higher?

Short-Timers: I’d keep an eye on the 50 day simple moving average at $42.56 to see if the strength is there for push higher. If we can clear that, we might break out of this descending triangle (typically a bullish pattern) and move back to $44 a share and if we fail, the triangle might turn into a downtrend channel. Still, for those with itchy trigger fingers, this could turn into something profitable IF you can time it well.

 Xlud

For Those Playing the Long Game:
I’m going to admit a certain weakness with candlesticks, but the following chart seems to indicate a dragon fly doji or that the selling pressure at the start of the week was nearly absolved by buying pressure at the end and could indicate that the multi-week downtrend could be ending.

The most likely direction for the coming week will be up and where we go after that is the real question. Charting is more an art than a science because I’m sure three people could see four different patterns in the following chart. I see a potential head and shoulders set-up with a head at $44 and the neckline at $41.44, leading to a potential low at $38.88.

XLUw

Sector Rotators:
For those few out there playing the sector rotation game, I’d advise caution before committing everything to utilities. While they did outperform on Friday, they still have yet to show the strength necessary to break out of the xlu:spy downtrend channel. One of the complaints of technical analysis is that its focus the need for confirmation can lead you to missing out on the early stages (and high profits) of an upmove. Remember, we’re not here to offer advice but guidance. Given the weak performance over the last few months, are you willing to push more chips to the center of the table?

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Sunday Recap: Whither are we wandering?

When I first started this blog, one whole week ago…I thought that it would be a useful exercise and a chance to help focus my thoughts, but this past week was a challenge. Up and down with most of the large indices saved from another down week by the powerful move on Friday. Generally positive domestic economic news with sprinklings of the trouble and American fliers yet again in harm’s way in Iraq (with a tacit partnership with Iran no less.) Europe showing signs of strain as their economies weaken and the latest Tsar pounds his overly large breasts and declares he will not bow to the will of the West and launches his own sanctions on imported foodstuffs.

Just out of curiosity, did anyone else ever suspect he’s dealing with a heck of Napoleon complex? He’s of average height but tends to surround himself with shorter people. His successor/predecessor, Dmitry Medvedev, is all of 5’4”. Can you imagine Medvedev trying to kiss Michelle Obama on the cheeks at some White House reception? I’m betting some nice young Marine would love to pick him up so he could reach her.

So for all of the action last week, where could the market be heading now? I honestly haven’t the faintest idea and neither does anyone else. So this week we’re going to focus on the descriptive because:

  1. I leaving for a trip home tomorrow and don’t have the time to do an in-depth valuation breakdown
  2. You probably wouldn’t read it anyway

After crawling out of an ice cold lake in the Adirondack mountains, I’ll try to devote the time to answering this question but for now, look at charts of 2000 and 2007 and remember that if this is a topping out process, you have time to trade it. They generally take a year to resolve themselves.

Broad Indices:
When you examine the chart below, you’ll notice on pattern almost immediately (because I sorted the list to show it.) The list has been sorted by one week returns so you can see the trend; small and mid-cap benchmarks generally outperformed their large cap brethren. In fact, they were generally on a positive trend for the week while large caps needed Friday’s strong action to lift them into the black.

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As you can see in the chart, SPY lost ground to IWM nearly every day in this short month, but the pattern is perilous. Momentum wise, IWM’s short and long term momentum scores bottomed out in the single digit percentile rankings on 7/31 while SPY only bottomed out on 8/7. The better performance could simply be the first round of bottom feeders, technicians or Johnny come-lately’s deciding that the move back to prior support at the 200 day exponential moving average is a good buying opportunity.

International Markets:
China continued another strong week as the relative stability of what could be the largest (by population anyway) oligarchy in global history seemed a better deal than could be found elsewhere. Europe continued to be dragged lower as investors discount the expectations for stronger growth and the anxiety over an expanding trade war.

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Domestic Sectors:
No clear themes emerged from Friday’s action with the possible exception of “the last shall be first” as those sectors that have lagged the over the last three months began to find bidders, most noticeably utilities as selling pressure seems to have exhausted itself while higher-margin tech stocks with their strong YTD performance eked out only minor gains.

I have more analysis on utilities in another posting that will be going up shortly. The real question is how long before advisors decided the utilities are already overbought (what do you think….Wednesday?) and decide to rotate into whatever other more defensive sectors haven’t participated as much? Will consumer staples finally have its day?

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Fixed Income
Treasuries, Treasuries, Treasuries. Get them while they’re hot! The real question is how much the new military action in Iraq could conceivably cost? Humanitarian aid is not cheap (neither are hellfire missiles.) How long before we can get details on the costs and the potential change in Treasury issuance for 2014/2015 to cover it? More Treasuries=lower prices? Treasury yields seem to have found their way back down to where many economic prognosticators feel our long-term GDP growth rate is somewhat stable. Will a new war and increased government spending help lift the economy out of the doldrums?

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The final chart I’ll leave you with this week is my risk-proxy of JNK/IEI. As you can see, it’s stabilized but remains in its downtrend channel. Have high yields spreads finally reached a level to draw investors back into the market or will outflows continue?

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Want to Guarantee A Comfortable Retirement? Marry a Nurse.

One of the most common lessons in investing is the need for portfolio diversification, to use assets with low correlations to reduce the volatility of a portfolio which might sacrifice some potential return in the short-term while providing for higher long-term returns by reducing draw-downs during equity pullbacks. It’s the first lesson taught in investing 101 and is so thoroughly incorporated into the language of financial professionals that it’s probably the only thing that literally everyone in the industry can agree on. But diversifying your investments is only part of the process so gather around for story time.

When I was in grad school, I took a capstone course that meet on Friday afternoons and ran for three hours so needless to say, it wasn’t particular well attended despite the fact the professor was fairly well known, the former dean of our business school and played tennis with a soon to be Fed Chairman from Princeton. One day not long before the end of the semester, the professor turned to the room and said to us, “I’m going to tell you how to make a fortune and live a comfortable retirement.” Well that managed to drag us out of our afternoon siestas and we looked onto eagerly, waiting for this bit of wisdom that could provide us with the wealth we needed to insure that we would never actually to use anything else we had learned there. Seeing our eagerness, he walked away from the board and in a perfectly flat voice said, “You want to enjoy your retirement? Marry a nurse.”

Saying we were stunned would be an understatement. Was this why we had sacrificed so many Friday afternoons when we could be making an early start of our weekends? But then he said, “Let me finish. You’re all going to work in finance or accounting when you leave here and I can guarantee that no matter how smart you are or how hard you work one day, the market will turn or your division will have a bad quarter. When that happens, you’ll be laid off. It happens to everyone, it’s part of the business and how the game is played.”

“So what happens then? The market pulls back and you’re laid-off. Well guess what, it’s worse than you thought because so much of your compensation is deferred in the stock of your employer and that’ll be losing value too…just when you need it the most (ask anyone who worked at Lehman about that.) And because you work in finance and think you know better than everyone else, your portfolio is 100% stock so what do you think is happening there?”

“Remember, your portfolio consists of two assets; the financial capital you’ve accumulated till now and your human capital that will be earned in the future. For most of you in this room, you have no financial capital but that doesn’t matter because the most important asset in your life is yourself; the knowledge you gained here will help you make more money when you graduate. From that higher starting point, you’ll earn more over the course of your working life and if you discount it back to today, the present value of those future earnings has increased dramatically. As you work and the years go by, the value of your human capital will begin to fall but your financial capital, everything you’ve saved and invested will grow and compound over time until you reach retirement. Then your human capital will be close to zero and your financial capital will have to meet the bills so you buy bonds, leave some in cash, put a little in stocks and hope you get that 4% real return to see you through.”

“So how can you protect your financial capital when you hit a rough patch in your professional life…marry someone in a completely different industry. My wife is a nurse, but who cares? Marry a teacher, lawyer, cop, just don’t marry someone in the business. Think about it; you marry a mortgage broker for Countrywide (don’t judge me, it was the mid-2000’s) and you both get laid-off during a pullback…what happens then? How are you going to make ends meet besides raiding your financial portfolio while the value of your human capital is falling? You’ll work again, but those future earnings will be lower and you’ll have less financial capital today to help plan for tomorrow.”

Marry someone who’s job isn’t dependent on whether stocks are rising or falling. It’s the ultimate portfolio diversification. When you stumble, they can be there to catch you and keep you (and your human capital) from falling and you’ll do the same for them someday.”

Remember, the most important asset in your portfolio is YOU so how can you better yourself to improve your earnings today and provide for tomorrow? So to all my readers I leave you with this; do you want to have a comfortable retirement playing golf or does your retirement plan consist mostly of “tender vittles?”

 

 

Buying the Dip – China Edition

As I mentioned in my last post; one of the most difficult domestic trends to manage in 2014 has been the “herding instinct” of many investors. While sector and style box rotation has helped make this year at least more interesting if less profitable than last year, the pullback last week demonstrated that when push comes to shove, investors of all stripes and creeds will be selling EVERYTHING and not just the biggest losers. So for those with an itch to invest and money to put on the table, where can you go where you’ll be well treated? Well a funny thing happened on the way to the exit sign last week; some investors went back to the most unloved of international markets, China. And they’ve been going there for months.

Yes China, the People’s Republic thereof, not Taiwan also known as the Republic of China which has trounced the returns of its large mainland cousin. China, the saber-rattling land of environmental disasters, newly constructed and totally empty cities, funky statistics only an Argentinian could love with a banking sector on the verge of collapse and where the new leaders are actively trying to imprison and execute their immediate predecessors. That China.  Don’t believe me?  Look for yourself.

spxAll of this negativity has helped drive equity returns almost nowhere over the last three years and now offers perhaps the most “undervalued” global market besides Russia. And both are not without their risks. Over the last five years ending yesterday, the S&P 500 has advanced over 92.8% while the Shanghai Stock Exchange has lost nearly 36% of its value while one of the older ETF’s offering exposure to Chinese stocks via Hong Kong, the iShares FTSE/Xinhua China 25 Index (FXI) is up over 7.3%. So far, unexciting and only the performance a global macro fund would love to charge you 2 and 20 for.

But the worm has seemingly turned so far in 2014. After spending much of the year in the red, things became desperate in March when most major Chinese bank stocks feel to the point where their price-to-book ratio was below one as investor discounted the value of the existing loan book because of the on-going financial woes. Since then, the Shanghai composite double based and then exploded higher in July and dragging the Hong Kong oriented China ETF’s with it. My preferred vehicle, the iShares MSCI China Index (MCHI), has had a great few months rising over 16% in the last 3 months to bring its YTD return to 6.23% and during the S&P 500’s stupendously awful last week, it even managed to turn a small profit. I’m sure my more technically oriented friends are now just waiting for a pullback as I’m sure today’s poorly received HSBC China Services PMI is to provide us, but the real question is what could propel us higher from here.
The real China story isn’t that the situation has gotten dramatically better, its more about that it hasn’t gotten dramatically worse so you need to step back from the quantitative and go to the qualitative.

1. Despite concerns over financial stability – the anticipated implosion in a fiery haze of various Chinese investment trusts has not yet occurred.
2. Financial Easing – the PBOC has recently announced cuts in the reserve requirement for a handful of the largest banking institutions. While not quite a formal easing operation, it does show a willingness to consider other alternatives and a flexibility that had been previously sorely lacking.
3. Financial Openness – Trying to stem capital outflows, China has shown a desire to expand investor access to the domestic A-share market and it’s lighting up the board for Chinese investment firms and brokerages.
4. Political Consolidation – The new leadership has been living it up with an old-school purge of the prior leadership, trying to root out corruption wherever it can. While not quite democracy in action, it shows a commitment to change as well as improving economic efficiency as well as discarding the previous regime’s policies and hopefully stabilizing the economy.

Make no mistake, China is still a country caught in the midst of a slow motion disaster and you can read more about that on Michael Pettis’ excellent blog here, but the country does meet the Yinzer Analyst’s favorite criteria for determining to deploy capital….THEY’RE EASING. We can argue monetary policy till we’re blue in the face but my viewpoint on 2014 has remain unchanged; monetary policy is tightening (less easy is more tight in my book) in the U.S., unnecessarily tight in Europe but could ease soon, and hopefully easing in Asia. Given the poor prior performance in China over the last few years. Now could be the time to take the plunge but consider what you’re buying first and the price you’ll pay.

Investing in China is still an experience in finding close substitutes rather than buying direct. Despite the increased willingness of China to cross-list Shanghai Exchange names in Hong Kong or allow more A-share sales to foreign investors, most Chinese oriented ETF’s and mutual funds invest in Hong Kong listed shares as MSCI has declined to add A-shares to their indicies. One of the largest and broadest products in that space is MCHI, but make sure to visit the iShares website here to find out more about what you’re buying. China’s financial problems are by no means resolved and like all emerging markets, bank stocks make up a large percent of the market cap. For MCHI, it’s over 35% and largely concentrated in the largest banking operations that have already seen a big share surge in 2014 with price-to-book rations trading closer to their western counterparts.

Diversification is also an issue; despite having over 140 holdings, 10 of those make up 51% of the portfolio with over 10% in Tencent Holdings. Tencent Holdings, up over 30% in 2014 has contributed slightly more than half of the returns of MCHI this year. That doesn’t mean you should give up on MCHI, but know what you’re buying first.

For those more adventuresome, five new ETF’s have recently been released offering direct exposure to the A-Share market, the biggest of which is the DB X-trackers Harvest CSI 300 China A-Shares (ASHR). With nearly 300 positions, the concentration risk is definitely lower with only 21% in the top ten names and with a correlation of nearly 1 to the Shanghai exchange, you’re definitely getting the systematic exposure to the Shanghai market. But what you’re also getting is a very different group of companies than MCHI, much smaller and less established with the average market cap being $10 billion versus $40 billion on MCHI. Holders of ASHR will have more stock brokerages and real estate companies than banks like MCHI along with higher fees, lower volume and a higher bid/ask spread.

Chartology:
In the near-term, both MCHI and ASHR have risen to what would technicians would consider overbought status and both are likely going to need a time-out before being allowed a move higher.

MCHI:
After a valiant struggle, MCHI seems to have finally moved above a long-term ascending wedge pattern and gotten back to its old high established close to the ETF’s inception date. What to watch for now would be whether it can maintain this level over the next few weeks while allow the technical picture to ease into a more neutral setting for a further advance higher.

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ASHR:
Due to its short history, technical are of fairly limited use but the recent parabolic rise reminds one of a bump and run formation showing enthusiasm that may or may not be warranted. Watch out for profit taking off such a strong move!

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Long-Term Investors – Shanghai Exchange
For those investors and asset allocators with a more long-term outlook, now might be the time to consider putting some capital to work as long as they temper expectations with the understanding that 7.5% GDP growth to infinity won’t be happening again. China has a host of issues to work through but it is possible investors have been too pessimistic for too long.

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Sunday Recap

So is it time to begin panicking just yet…maybe? After a summer of snoozing through 13 weeks with an average 8 point advance, volatility hit the S&P 500 squarely in the solar plexus last week as we suffered through our first 1% day in what feels like forever. Everyone on the Street but the guy selling dirty water dogs took a beating, but isn’t that what the market is all about. Shaking out the weak hands and offering buying opportunities? What made last week so challenging for asset allocators of all stripes was that Thursday’s liquidity driven blowout hit every domestic equity sector. Your positions were going down regardless of how carefully you thought you had diversified and a quick look across the one week style box returns shows the carnage.

As you can see, the pain inflicted on small and midcaps in 2014 has finally spread to large caps as the trend of their recent outperformance seems to be coming to an end. Even sector rotation only helped to blunt the pain as the year’s best performers, reit’s and utilities, both lost ground as investors took some chips off the table.

But telecommunications looks to be coming back from near death as does the Far East on the internaSECtional side, but more on that later.

INT

The daily chart of SPY below shows that a divergence has been forming for a while with SPY continuing to move higher while its trailing 20 day Chaikin Money Flow score showed continued distribution.spy

And of my preferred risk proxies, the ratio of SPDR Barclays Capital High Yield Bond ETF to iShares Barclays 3-7 Year Treasury Bond etf or in stockcharts short hand, JNK:IEI (for more matched duration) has been flashing trouble since the start of the month, just as it did in January.jnkiei

How bad has the breadth gotten? Only 30% of S&P 500 stocks are above their 50 day MA while approximately 68% are hovering close to their 200 Day MA. A momentum tracking model I have been developing thanks to some great work done over at the Capital Spectator shows that short and long term momentum scores for SPY are close to levels not seen since late last January.

50R

200R

So far, everything I’ve said has been descriptive and I’m sure you’re wondering where the value-add is at in this blog so far. As I’ve said before, my goal here isn’t to generate trade ideas but to foster discussion. Mostly because:
A. I have no idea what your goals, means and financial objectives are
B. I could be totally wrong

But before you go rushing off to buy SPY, Ultra SPY or if you are our friends at Good Harbor, UWM, stop and think about the last week. Do you think the weak momentum and recent rout are enough of a pause to shake out a few players and now is the time to buy the dips or are you going to liquidate and buy some gold to bury in the back yard?

For those more tactically minded, before I’d get too eager to buy, I’d wait to see if the Chaikin Money Flow score begins to improve, preferably with a reading above .05. I’d also wait to see if JNK:IEI begins to stabilize and move higher while the SPY begins to find support. We bounced off a long-term uptrend line on Friday at 191.57 and there’s strong prior resistance just shy of 190 while the legs of the most recent uptrend line are back at 185.56. With plenty of support between 185-190, a nice bounce around here wouldn’t be unexpected as the pullback stops and allows investors to catch their breath.

Where are we going after a bounce? Well for those with a strategic outlook, on a weekly basis we’ve pulled back nearly to the uptrend line that has supported the 2012 advance, but that’s a topic for later this week. Buying pressure has definitely eased since June and no one ever got fired for deciding to trim their equity allocation after letting it ride. But that’s enough for today; come back later this week for a strategic flavoring.