Off to the Heartland!

Hey Fans, the Yinzer Analyst is off to the great state of Iowa to do some first hand research on agricultural conditions and how that could impact the emerging ag REIT market.  The best way to do that is through visiting the farms and speaking directly with the farmers…preferably over a sandwich that consists of a fried pork chop between two pieces of bread.  Or at an Iowa State football game, but when you want to know all that you can, you have to go right to the source!

I’ll be out of touch (and in a fried food coma) until next Wednesday so to all those traders out there, keep your heads down and stay frosty.

The Number One Yinzer

A Cause for Applause

I swore that when I started this blog, I wouldn’t let myself get so caught up in one trade that I would talk about that to the exclusion of everything else. Been there, done that, not going back…except for this one time because admidst today’s overall exciting action, there was a faint glimmer of hope for energy stocks.

On Sunday night we talked about the weakening breadth and if you follow the financial news at all, pretty much all people have been able to talk about is how weak the market is acting, the economy is turning, the sky is falling, oh no! First of all, work on some deep breathing exercises, do some stretches, watch a little tube but in general just chill bro.

As you can see, both the S&P 500 and NASDAQ saw a slight bump in the % of stocks above their 50 and 200 day MA and volume was marginally higher than it has been over the last two days so maybe this one-day rally can help build a new support level for the markets. S%$t had hit the proverbial fan over the last two days and the sell-off had come too far too quickly at least for the S&P 500.

spx

COMP
But news that the PRC would “replace” the head of the PBOC with someone more to the new administrations liking has sent a shiver of stimulus hope up the legs of equity investors over the world and all those awful commodity trades of the last few years saw a spark of life. Check out a few of the winners:

dbc

Dr. Copper managed a win:

jjc

Even West Texas intermediate crude came out ahead:

wtic

EM equities managed a solid day on strong performance on Chinese growth expectations while the Chinese A share ETF was off like a prom dress:

eem

 ASHR

The only loser on the day, equity precious metals as the prospect for global inflation remains muted:

gdx

What I’m interested in is the relatively lackluster performance of energy stocks compared to the broader market today. At first glance the chart is pretty dismal; XLE hit the 200 day MA at the open and managed to scrape out a small positive return for the day but was still off the high. First look at the volume on the day, it was enormous and helped turn the CMF score around.

xle1

Now check out this chart for today’s action using 5 minute bars. Lots of heavy selling at the open followed by buying heading into the European close when the usual afternoon lull sets in. Most of the selling pressure has gone allowing for a gradual drift higher into the usual 3 o’clock institutional trade cycle. Strong selling pressure at the open isn’t surprising given how weak the price action has been over the last week. Momentum scores are close to their lowest levels of the year and before today, we were looking at a loss of nearly 8.25% since June 23rd for XLE.

xle2

My first thought was that more than a few traders, human or otherwise, had outstanding orders in case XLE hit the 200 day and which could explain both the strong selling pressure followed by the nearly as strong buying pressure at the open and this is still a strong probability to consider before putting on a position. Given that we’re now only two days into trying to form a new base at $92.22 for XLE, I’d be hesitant to add to a long at this level and moves off a 200 day are the trickiest. My experience with commodity related sectors and trying to time a trade has been to keep a close eye on them and set a trailing stop just slightly below the base as you can count on buyers to help keep you above the 200 day once, but they’re fickle. At the next sign of weakness they’ll look to blow out and take you with them. Set your initial price target at $94.50 and if we can clear that hurdle, the falling 50 day moving average will be next.

Happy hunting out there and remember to keep calm and carry on.

Sunday Night Recap

After a week of pent-up frustrations (talking about the market), ‘Quad Witching’ Friday saw the great unleashing of said frustration, as Scotland decided it’d rather take its chances with an emotionally distant England than slapping on some lipstick and prettying itself before heading off to see if the EU is still interested. So after two days to digest Yellen’s “extended period”, a truly united United Kingdom and the great Alibaba IPO, Friday ended after a mostly back and forth session that should have left large cap investors worried and small cap investors positively fearful.

The Big Picture:
First, anyone who still wants to look at the tables of ETF performance can find those at the end of the article. Take a look at this chart of the Dow Jones Industrial Average (I know, who cares about this?) and zero in on Friday. Huge volume and a close near the open/low of the day as some investors choose this moment to take profits but just part of a larger trend amongst large and mega caps that outperformed for the week. In fact, large cap outperformance has gone from amazing to downright disturbing as mid and small cap investors run for the hills.

indu
Here’s a chart of the Vanguard Mid-Cap Vipers compared to the S&P 500 and then the Russell 2000 iShares to the S&P. Mid-Caps are holding their own while still being stuck in a trading range but the Russell 2000 continues to get beaten on like a rented mule. Long term momentum scores are close to the lows of early August but you could still see a few days of weakness ahead. For the intrepid investors, there could be a good buying opportunity for at least a short term trade this week.

vipers

IWM
But the relative strength of large-caps belies a disturbing trend of weaker breadth. Fewer stocks are helping carry the S&P 500 to new highs while the situation for the NASDAQ has gotten positively disturbing. As you can see from the chart below, the S&P 500 had Friday not unlike the Dow but with a small loss on the day, but a similar pattern of weak participation has been forming for some time. The % of stocks above their 50 and 200 day moving averages has been moving down steadily with the market since early September and remains well below the levels of June and July. A longer term chart shows that this is part of a pattern that has been playing out for some time.

S&P

Shifting the focus over to the NASDAQ where we’ve overlaid the % above the 50 and 200 day compared to the top NASDAQ 100 is nearly as revealing and better shows the overall weakness of the small and mid-cap names. Hardly a reassuring sign of market strength

NASD
Domestic Sectors:
Healthcare continues to be the big winner in the domestic sector game as biotech tries to regain momentum lost over the last few weeks although the real standout has been the pharmaceuticals sector (at least IHI anyway.) Financials and consumer staples tried to keep their good thing going (or at least their one month performance trend) although it’s really a tale of two cities. While financials are seemingly going to benefit from a steepening yield curve, the uncertainty over rate increases held them back this week and when looking a longer-term chart, they remain stuck in a trading range relative to SPY. Consumer staples momentum has been bottoming out for an extended period and whether this trend can continue remains in doubt.

xlf

xlp

Two other sectors worth mentioning are utilities and energy. Utilities pulled out a slightly worse than market performance for the week but remain in a downtrend relative to the broader market. It’s hard to consider going overweight in the sector without seeing signs that it has more to offer. Energy stocks tell a similar story and leave one wondering whether this week’s small gain was more of a dead cat bounce off a prior resistance line.

XLE xlu2

Foreign Stocks:
The price action for foreign stocks remains grim and has left them as probably the only attractive segment of the investment market based on fundamental valuations or relative momentum. I don’t want to say, how could it get any worse but I’m totally going to think it.

Let’s consider the example of the iShares MSCI EAFE ETF, up a resounding .73% YTD compared to the more impressive 10.28% for the Vanguard S&P 500 ETF. When you consider this weakness relative to the S&P 500, EFA is back a level not seen since the 2012 ‘summer of the hatred tour’ in Europe when the prospect of messy collapse for the EU seemed all too real. While seemingly poised for a bout of deflation and yes, they may have to take down the “15 Years Since a War” sign, consider the counter-argument. Calls for easing austerity have increased, the ECB seems committed to actual growing their balance sheet and the depreciation of the Euro is long-overdue and will eventually help stimulate growth. European stocks still look to be the big winners of the EFA(it’s all relative people) and a quick gander at VGK shows that its first attempt to move higher after hitting long term support was premature.

VGK

Doesn’t mean they have to go up or up quickly versus American markets, but something to consider especially with December and the annual Great Rebalancing just a few months away. By now portfolio weights to domestic equities versus foreign have surely gotten out of whack and will need rebalancing.

And with that, it’s time go and see if Big Ben can find a way to hold off the Panthers so we don’t find ourselves slugging it out for the bottom of the AFC North with the Browns.

The FED is not your friend

My apologies for the lateness of this post but it’s been a rough few days for the Yinzer Analyst. I’ve been meaning to write a post-FOMC update for a while, but did you ever have one of those days where you couldn’t start something without a distraction coming along? Well after a few days of dallying with mutual funds, derivative prices and telenovelas, I’m back in the saddle. Don’t judge me, you try not getting sucked into La Patrona.  But to make up for it, it’s time to do a deeper dive on what the FED is planning, why they’re doing it and how it could affect your portfolio.

When it comes to the FED and their announcement on Wednesday, there is literally so much you could talk about and almost none of it is worth mentioning. Meetings that end with a press conference are fascinating; so much energy is spend debating the meaning of every word that Chairwoman Yellen utters that I think a lot of people tend to miss the bigger picture. Some focused so much on the term “extended period” that they overlooked the importance of the dot matrix and that the FOMC thinks interest rates will have to rise faster than they previously thought. To be fair, they always think that and for the last few years, they’ve always been wrong too which is partly why the FED fund futures show a far less steep advance over the next two years. But the amount of separation between the fed funds futures and the dot plots is pretty amazing.  But remember the essential message, rates are going to go up and whether they start in the 2nd or 3rd quarter of 2015, it’s time to start thinking about ramifications. Besides, the most important lesson to remember is that the Fed doesn’t have to raise rates to get them to move higher.  They just have to signal what they plan on doing and the market will often beat them to it.

For my money, I’m not so willing to bet against the FED on this one. Recently a friend invited me along to hear the new president of the Cleveland FED speak at a luncheon hosted by the Economic Society of Pittsburgh (yeah, we have one of those and what’s it to you?) I mostly skip the prepared remarks and just go to the Q/A because you will always two questions:

  1. Why does the FED hate savers? Always asked by a local credit union manager. The answer is that there are more borrowers than savers, so get over it.
  2. When will velocity rise?

Loretta Mester (Cleveland FED) did something I’ve never noticed before when someone asked her about #2, she smirked and from her answer I took away that the FED’s goal is to increase velocity and they’re going to do it the only way they can…by raising interest rates. I don’t want to spend too much time debating the quantity theory of money or whether Keynes or Tobin’s Liquidity preference theory was the right one because at the end of the day, no one cares. What they do care about is that there’s a clear and established relationship between velocity and short-term interest rates and correlation doesn’t equal causation but the FED has one thought it mind. When QE3 ends, how can they stimulate the economy further? Fiscal policy is too tight and they don’t want to create additional imbalances through low rates, so why not raise them instead?

fredgraph10

Remember, there’s always a certain amount of “money” being kept in transaction accounts because enough individuals know that at some point, rates are going to go up and the value of their bonds (or in this case, bond funds or etfs) will suffer. They hold onto to excess cash because they know that in the future, rates will rise and affecting the value of their bonds. Some invested in equities, but even then there’s a resistance to investing more in risky assets. The textbook (and old one in this case) says that as rates rise, liquidity held in reserve will fall. Why?
I. Because at every rate increase, some investors will believe that future rate increases are less likely.
II. Some will want to lock in lower financing costs now by borrowing and spending.

Think of it with a home mortgage; if a 30 year mortgage is now 4.25% but you think could be 5.25% in six months, that’s a motivation to spend today.  If two holds, you could actually get an increase in economic activity as the FED raises rates which would lead to their needing to rise faster than most investors originally thought.

Strategies around the FED:
I can’t pretend that I have all the answers or even very well thought-out answers about how to deal with life after the end of “extended period” but I know it’s time to be asking the questions. It helps to take the major steps of the QE process one at a time:

  1. Real rates have been negative in the U.S. for some time, which encourages all sorts of risk taking behavior that don’t result in riding a shopping cart of a roof. Actual inflation was modest but still higher than short-term rates. The U.S. took over the role of Japan in the late 90’s carry trade.
  2. Those negative real rates spurred investors to seek out yield wherever they could with a major capital flows into emerging markets, commodities, equity precious metals and real estate. Those trends reversed over the last few years due in large part to all the hot money that flowed into them in 2010 and 2011 and because the specter of deflation has largely been defeated.
  3. Within the credit arena, there was a massive quest for yield that led spreads lower almost universally across all fixed income asset classes. Think emerging market bonds where at times a 10 year Egyptian bond could offer the same yield as a ten year Treasury.
  4. Negative real rates or even very low nominal ones allowed for much higher equity valuations. Even if you hate MPT, remember that it’s the most commonly used language within the capital markets. I remember using a modified dividend discount model to estimate investor return expectations and was shocked by how low that could be until a friend at Booth reminded me that real rates were negative. Even the old fashioned CAPM will show a low cost of equity given how low rates are right now.

And all of that is about to change. Peel back the surface and it’s already happening as the reality of higher rates in the near term meets falling inflation expectations to help lift real rates into positive or at least less negative territory.

First, the US dollar has broken out its long term (using monthly charts) pattern and moved higher. A cooling off is in order but with the reduced attractiveness of EM investments not to mention the pain trade in the Euro, the dollar will probably have a floor before too long and good luck getting it lower which should cause only more pain for commodities from here on unless inflation becomes a clear and present danger.

USD2
The brief rally in commodities and precious metals at the start of 2014 as a period of economic weakness kindled hope that QE would have to be prolonged has ended as higher rates are a certainty while inflation is still low. The FED’s made it clear that they really aren’t all that willing to consider higher inflation at this point.

gDX3
Sectors that were bid up because of their higher dividend yield have suffered as rate increases are a surety at this point. Utilities and REIT’s are also “price takers” in that higher interest rates will directly affect their return to investors, XLE is tied to oil and thus to inflation as is GLD while XLF is a price maker and a steeper yield curve and the prospect of higher rates and higher transaction demand is giving hope to both higher net interest income and fee revenue. Take a look at the chart of the last 6 days ending 9.18. XLU is doing better today, but only as a defensive sector against broader equity weakness.

infl1
History has shown that stocks can do well in a rising rate environment, but earnings have to be growing at a faster clip. Rising rate environments usually occur during periods of fast economic growth as the FED seeks to pump the breaks on economic output. So far in 2014 the trailing twelve months EPS growth for the S&P 500 has been approximately 3% (which includes about .5% drop in shares outstanding) so not much faster than overall GDP while margins have begun to pull back. The mild p/e multiple expansion in 2014 partly accounts for that lack of earnings growth. Going back to the DDM, if interest rates rise and growth remains anemic, it becomes that much harder to justify current valuations.

So my question to you is this, what else is going to change going forward and how can you plan for it? While Europe continues to take too much getting its act together, I think favoring the areas where fiscal policy has to be loosened while monetary policy is also easing makes sense. That’s Europe in a nutshell and certain EM markets have seen the bulk of their capital outflows happen already. China looks like it’ll stabilize at a lower growth rate, but given the equity weakness of the last 3 years that’s already baked in.

Better Together or follow Willy?

The major event of this week isn’t the opportunity to listen to Janet Yellen avoid answering a single direct question while talking out of both sides of her mouth after the FOMC meeting ends on Wednesday, but the upcoming referendum on independence in Scotland on Thursday. As someone who spent the better part of a year living in the UK, I have to admit that my emotions are conflicted on this one. As someone of English (and Scottish) descent, I’ve always been drawn to the UK and I learned so much during my time there. Like “spotted dick” is not what you think, that nothing good ever happens at last call and that no matter what the situation, Frenchwomen are never to be trusted.

Mostly I’m having a hard time trying to decide who the bigger ass in what has been the single most reprehensible event in British political life since ever. One on the one hand, you have a British PM who gambled on a referendum to settle an issue that ranked pretty low in a country ravaged by multiple recessions in the last few years and on the other you have megalomaniac in the Scottish first minister who’s decided he rather be the leader of a small country than the governor of a small portion of a much greater one.

And with polls still showing the “yes” and “no” camps running neck and neck with each other, it’s been an understandably rough summer for British stocks. While performing better than their single-currency counterparts on the continent (EZU), they’ve noticeably lagged U.S. stocks with the S&P 500 up 3.15% from June 1st through today versus a loss of .59% for the FTSE. Using EWU as a domestic proxy, you can see the drubbing the ETF has taken over the summer (it’s down 3.1%) and especially around September 8th when those in favor of Scottish independence briefly moved ahead in the polls. Lately the volume has shifted in favor of the buyers, but EWU has been trapped below its 200 day simple moving average and has more resistance at the 50 day. EWU will be the fund to watch on Thursday morning. The Yinzer Analyst is tempted to buy EWU at these levels because he wants to believe that the Scots aren’t crazy enough to vote for independence but having lived in the UK, he knows that when it comes to gambling on a Scot to do the smart thing, there is no sure bet.

ewu

How realistic are the prospects for Scotland choosing independence? There is literally no end to the logical arguments being made to preserve the Union, mostly by pointing out what a dire fiscal situation Scotland will find itself in after independence. Honestly, within 5 years they’ll either be opening casino’s or the country will look like something out of a Mad Max movie. If you want to read more, I’d encourage you to stop by the Financial Times here.

But like most American’s, I get my news from “alternative sources” and to that end, let’s listen to persuasive arguments being made in favor of the Union by that most famous of Brits, John Oliver and the most famous Scot in the world.

Pro-UK:

Free Scotland:

Weekly Recap – Yagottabekidden

It’s been a rough few days for the Yinzer Analyst; first the Steelers are demolished by the Ravens, then Cleveland takes down New Orleans and after finally turning my back on the Buffalo Bills, they somehow manage to take the lead in the AFC East. When will the hurting stop? But before the Yinzer Analyst drowns himself in a sea of Iron City, there’s always time for another weekly recap.  Yagottabekidden?

But if you thought it was bad in the AFC North, you weren’t watching the action in the markets last week. Friday was the perfect way to cap off the first down week for the S&P 500 since July, with the market being sold early and often on Friday until buying action after 3:00 p.m. helped moderate some of the damage. Let’s start off by looking at the sector spread for the week.

dom2

As you can see in the chart, the early momentum leaders for 2014 were beaten like the red-headed stepchildren of a rented mule. We’ve covered the energy sector at some length, but this week’s biggest loser was also 2014’s biggest winner, REIT’s. Amid some profit taking and a general equity sell-off, REIT’s lost over 5% on the week while other high fliers such as utilities and equity precious metals met a similar fate, down 3.17% and 4.75% (using GDX) respectively. Why did these two take it on the chin? One factor to consider is a steepening yield curve as the prospect for higher rates in the immediate future becomes more of a reality for many investors. REIT’s and utilities, thanks to their debt heavy capital structures, are much more sensitive to shifts in interest rates and could be feeling just a hint of a margin squeeze in the immediate future. And as we talked about last week, inflation expectations have been falling steadily for several weeks, taking some of the wind out of golden sails.

gdx2

And as to the utilities, the Yinzer Analyst is having second thoughts on his mistaken “head and shoulders” pattern for the XLU. Yes, it’s behavioral finance 101 but maybe the market just hadn’t proved us right yet.

xlu

With the technology sector the only one to keep a level head for the week, the distribution of the broader market indices is fairly easy to explain. More tech (less real estate, oye)= better weekly returns.

broadequity

The steepening yield curve has also taken its toll on bond ETF’s as only those with the shortest duration have escaped much of the carnage over the last few weeks. But those looking for a place to hide in short-term bond ETF’s should take note that the shifting yield curve dragged even those “cash alternatives” into negative territory for the week.

bond5

What about taking your money abroad and hiding out overseas? At first glance it looks pretty dismal but peel back the negative performance for the week and we still think position more equity overseas can be a sound strategy.

int3

As you can see in the chart, MCHI had a pretty bad week but as you can see in the chart, both MCHI and the mainland A-share market charts show consolidation which might go on for a period of weeks.

mchi2 $ssec

Meanwhile, momentum could possibly be reversing in Europe as both EZU continues to hold support above its recent lows while even the broader MSCI EAFE shows signs of gathering strength against the S&P 500 as the dollar looks like it wants to give up some ground. This could be the trend to watch for the 4th quarter, but for now the Yinzer Analyst is going to open the Iron City and pray to the football gods not to let Cincinnati run away with the division.

dollareuroezu-spy

Checking in on Energy Stocks or “Thar she goes!”

Well when I started this post on energy stocks early this morning while I waited to order the new iPhone (because it’s time to admit that I’m old and I like the larger icons and easier operating system) I had a very different conclusion in mind. Since our last post on Tuesday, energy stocks had begun to make their stand around as part of a larger adjustment in investor attitudes that I’m sure according to CNBC is due to the President’s fight against ISIS, Scotland, Ukraine, government manipulation, etc.  But after today’s action, we remain of the opinion that any near-term bounce should be used as an opportunity to sell out.

xled3
Using XLE again as a proxy for the energy sector, buyers were stepping in for the last two days and finally helping XLE hold the line close to $95 before today’s decidedly negative price action.

xle911You can see it clearly in this XLE chart for 9/10 and 9/11 when buyers stepped in on Wednesday after the European close and by late in the day to help XLE move off a low of $93.81 to within spitting distance of its starting point. And on 9/11, XLE opened sharply lower only to repeat the same feat as West Texas crude oil and Brent both put in their first positive day since September 3rd. Since June 19th, WTIC has dropped 12.2% while Brent is off over 14.16% and brief periods where prices have tried to base were met with additional selling.

xle912And today the story turned back to one of selling as the European close has come and gone and no new buyers have chosen to step up to the plate. What’s to blame? Could it be the next round of sanctions on Russian energy firms? RSX is holding relatively steady and slightly positive as of post time while EFA and EZU are showing slight losses and improving relative momentum compared to SPY as the tide seems to turn for Uncle Buck. Could it be the steepening yield curve as the ten year treasury yield spikes above 2.6% and the spread between 2 and 10 continued to widen? Investors do seem to have decided (for now) that interest rates will rise sooner rather than later and that expectation of more stringent efforts to fight inflation could be taking their toll on commodity prices. The five year breakeven has fallen steadily from 1.97% on May 22nd to 1.69% on 9/10 as the TIPS sell-off has pushed the 5 year TIPS constant maturity yield back into positive territory.

At the end of the day, the energy sell-off can be attributed to any number of factors but the most important to keep an eye on is the broader market. Equities are down across the board and there’s enough literature documenting that momentum does persist. Winners continue to win and losers continue to lose and given the amount of weakness in energy stocks over the last few months, their under performance isn’t surprising.

xlespy2

Next stop for XLE, $93 and let’s see if the bounce can give holders another opportunity to sell-out.

Buying the Dip in Energy?

It’s been a rough few days for energy stocks and like all of you, I feel the urge to do some prospecting. But before I go full Daniel Plainview, I need to stop and think about the attractions of energy stocks and what’s working for and against the trade and to quote Jim Cramer in Arrested Development, I’d have to say they’re a resounding “Don’t Buy!”

Perhaps the biggest item in the pro column is that West Texas Intermediate Crude is right back to where it started 2014 as North American production coupled with falling tensions in Europe and a U.S. backed effort to keep Iraqi production out of the hands of Sunni militants seems to have done its job. But then again, WTIC is a cruel cruel mistress and tends to have a seasonal pattern. Let’s check in on a weekly chart to see what’s what:

WTIC

Well as an Egyptian friend of mine used to say, “craps%$t.” Yes, no one ever had the heart to tell him he was saying double crap. That can’t be good, let’s switch gears and check out Brent Crude and our friends at the Short Side of Long to see what they say.

Brent
Double craps$%t.

So the trend isn’t going in the right direction there. What else could be working against us? Well since the Euro and Yen have been losing ground in 2014, uncle Buck has been (and has to be) advancing in the right direction and starting a new pain trade for gold, oil and anything else you care to think off. Here’s a chart showing the USD’s advance versus the pain of the Euro and Yen. Yes, the dollar may appear to be overbought but remember currencies are a relative game. As long as people don’t want Euro’s, they’ll buy dollars and it can go for as long as it wants. Never stand in front of a stampeding crowd.

USD

Now that we’ve established all the reasons going long energy won’t work, let’s talk about why there’s still hope in the energy trade using XLE on a short-term basis. Let’s go down the list:

  1. Now that every hedge fund, macro trader, CNBC watcher is long the dollar, we should expect the buying pressure to ease. Especially given Draghi can’t get the Euro to parity with the dollar overnight and all by himself. Going to be a long process people.
  2. Technicals are favoring long energy, but most likely for only a short term trade.
  3. The Yinzer Analysts momentum models show XLE back to where it was at the start of August.
  4. There’s always less risk AFTER the price heads lower – as long as you can keep a close eye on positions.

But all things considered, I’d stay away from energy stocks and would use a bounce to cut my losses, not add to existing positions.

Skipping to item 2, let’s take a short and intermediate term picture for XLE.

Short-Term (1-2 Weeks)

xleD

Using daily charts, XLE looks to be stuck in a descending triangle, typically a bearish pattern indicating distribution. We have two lower highs to form the upper boundary of the move and nearly two equal lows to form the base at around $95. If you check out the 20 day CMF score at the bottom of the page, you’ll see that the August bounce was more about an exhaustion of sellers than an influx of buyers. What’s working in the favor of going long? The RSI is nearly back to oversold territory while XLE is closing in on strong support. If it doesn’t hold at $95, the next support is back at $92.50.

What to watch for is a one day bounce followed by distribution on day 2 to retest support and allow for more of this year’s buyers to sell out. If we do hold at $95, the most likely point to think about setting a trailing stop is at $98 or approximately where the upper boundary will be over the next week. That only leaves about 3.16% upside potential for a potential downdraft back to $92.50 of 3.14%. Not too exciting.

The Yinzer Analyst’s momentum models show XLE back to where it was on August 1 on a short term basis, as the trailing 1 year score has fallen into the bottom decile. That low point resulted in a 2% move over the next 30 days and longer-term scores have fallen even further offering hope we could get a more substantial bounce.

To time my trades, I’d wait for the 5 day exponential moving average to cross under the 10 day and begin moving higher, even though that might mean missing out on 50 cents, which in this trade could be a substantial portion of the upside potential. Here’s the short term trade again with the simple moving averages changed to those exponential lines and you can see that waiting for confirmation from the 5 and 10 usually leads to happier outcomes.

xled2

Longer-Term (3-6 Months)

XLEW
Looking further out using weekly charts, XLE is even less exciting on a long-term basis than a short-term one. XLE spent most of 2013 in a terribly unexciting uptrend channel that put points on the board in a very unsexy manner. You made money but still lagged the S&P 500 but then 2014 gets off to a bang. Besides the typical sector rotators buying whatever is cheap and trying to justify their fee’s with active management, you get a second tier terrorist threat trying to push its way into the Premier League plus Putin, who is downright scary. And oil does love uncertainty. But the buying pressure has eased and the pattern is uncertain. Could we be in another channel consolidating gains? On a weekly basis, the RSI score over the last 14 weeks is just getting back into neutral and not screaming “buy me now.”

xlespy
Take a step back and compare the performance of XLE over the last few years with the S&P 500 and you’ll see a familiar pattern. The falling wedge, typically bullish and replicated by utilities and consumer staples as they’ve lagged the broader market for 3 years. Ending today, XLE has an annualized return of 15.67% versus 21.51% for SPY. No wonder everyone went gaga over it this year but it was the late comer to the party. XLU and XLP started the year stronger while XLE was fashionably late and arriving in March.

Looking at this chart, you can see XLE has given up all the ground it made against the S&P 500 this year and is nearly back to its relative momentum starting point. It might need some time to cool off before it can start a new, long term trend.

Weekly Recap – Keeping Score

As I’m sitting here writing this, I’ve watched the Pittsburgh Steelers go from demolishing the Cleveland Browns to nearly squandering what should have been another “sure thing” for the black and gold. And with Hoyer leading the charge for the Browns. Plus my Buffalo Bills managed to win it in overtime? The Bills? Dolphins beating the Patriots? What’s next? Dogs and cats marrying each other?

Since it’s Sunday and football season, this weekly’s recap seemed like as good as time as any to look back at some of our recent discussion topics to determine whether the Yinzer Analyst has gotten it right or wrong. If it was right, how’d we do? If it was wrong, what can we learn from this?

Good Harbor:
On the 27th we discussed whether recent mega-titan Good Harbor was going to be repositioning themselves into equities and the answer was a firm yes. Take a look at the following charts and you can see how their trades influenced the market in a few ETF’s. According to a friend, they went from 25%/75% equity bond to all in and replacing large cap equities with mid and small caps. If I had the resources, I’d love to look at their history and try to reconstruct what signals they were using.

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GH4

Utilities:
Let it not be said that the Yinzer Analyst can’t admit when he’s wrong and in the case of a head and shoulders set-up with the utilities, we flubbed it but not as badly as the Steelers did. Instead of retreating, utilities were one of the stronger performers on the week with the XLU moving up .79% and with the possible right shoulder completely demolished. Yes, volume was lower over the last few weeks, but rose slightly last week to put the nail in the pattern. Looking at momentum versus SPY, XLU looks like it wants to challenge the downtrend line and with the strong buying activity and with the RSI still outside the overbought territory, it could do it.

xlu-spy3

Europe/Treasuries:
With the de-escalation in the Ukrainian conflict and Mario Draghi’s pledge to think about going all in while he initiates a new ABS and covered bond purchase program, risk appetites are rising across Europe and this one is leaning our way. While the Euro continued to crack following Draghi’s announcement of further easing, European equities took the ball and ran away with it. Eurozone stocks (using EZU) loved the news while some of the PIIGS and France strongly outperformed on the news.

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EURWEEK

In fact, looking at momentum compared to SPY, EZU is bouncing off lows not seen since last summer and while this move has cleared the downtrend line, I’m sure a few of my compatriots could be thinking the ideal buy has already come and gone. Let’s shift to a weekly basis and you can see that this move could be in it’s infancy. If there was one place to overweight, I’d favor Europe. I’ll do another posting in the next few days on where we could position ourselves to find the point of maximum advantage.

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Weekly Recap:
So with all of that in mind, what happened here in the U.S.? The focus of the week was on the defensive’s as utilities and staples enjoyed solid weeks while REIT’s took the pole position for the week and consumer discretionary stocks made a strong showing continuing their slow and steady march higher after a disastrous start to the year. Among the broader U.S. index ETF’s the winners were those with the right overweight’s to those defensive sectors and benchmark/underweight’s towards energy stocks that gave up the entirety of last week’s gains.

broad

Foreign Stocks:
Emerging market stocks had a hell of a week as did China were the consolidation in MCHI seems to be over as the overbought conditions we discussed several weeks ago have largely been burned off. But after only a month off, this strong performance has already pushed the major China ETF’s back into nearly overbought territory. Their A-share counterparts at ASHR tell a similar story. And lest you think it was all Russia or China, India also put some big numbers on the board for the week.

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Look at the table below and you can see the shift from U.S. to Foreign and developed to EM. Will this trend continue ? Wait and find out.

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Bonds:
As you’d expect, about the only thing that made it into the black for the week were short term bonds thanks to their low low duration. Duration is your friend only when it’s going your way. The bond sell-off started on Tuesday with Good Harbor’s reallocation out of IEI and rumors of a cease-fire in the Ukraine but the TLT was nearing overbought territory and momentum scores were close to the highs for the year so a cooling off and move back to strong support was overdue. There’s strong support at $114.30-$114.40 and the 50 day exponential moving average at $114.90.

tlt

What to Watch for this Week:
I’m still in shock over the AFC East but my goals for this weeks are:
1. Know Your Mutual Fund Manager: Redefining closet cases
2. Monetary Policy and You: How to Play Europe
3. Promised posts on Agricultural REIT’s

Don’t be afraid to let me know what you’d like to hear more about. Suggestions are always appreciated.

From Russia With Love?

Did you feel that? That major shift in market sentiment that started on Wednesday and pushed some of the riskier pieces of sh….equities higher? If your focus is only on what happens with the S&P 500 or one it’s subsectors, you probably didn’t notice the rally in anything Russian or European or its sister movement in the traditional defensive enclaves of Treasuries or the gold miners.

The seismic shift in global sentiment was initiated nearly simultaneously by the new and fragile cease fire in the Ukraine while Mario Draghi proved that the markets still listen to him as he initiated both a rate cut and new asset backed securities and covered bond purchasing scheme. Both helped lift fears that have been suppressing European stocks since last May while their American counterparts moved onto to new highs.

Check out the chart below and you can see the change in sentiment for yourself. Not only did Russia catch a bid but the larger EU nations also moved higher while Eurozone specific EZU outperformer the broader MSCI EAFE etf. Meanwhile at home, TLT sold off and the GDX, well no nice way to say this so “it done got blow’d up.” Probably all the government manipulation to convince you everything is okay but it’s fallen through the sideways continuation pattern it’s been stuck in since July.

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GDX

And for those looking to play specific countries in Europe or regions compared to the whole, check out this table. The PIIGS or near PIIGS (France) had a great week but more on that later.

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So is it time to buy Russia?

As someone who has ancestral ties to Russia and a fondness for deeply discounted stocks, I’m very intrigued by what’s happening in Russia right now but if you buy here, be ready to buy even more when the prices inevitably fall again. Russia is cheap, there is no denying that and even with the recent rally, RSX has a trailing P/E of 6 and a P/B of .82. Yep, you’re reading that right, you can buy a pool of Russia’s biggest companies for less than the value of their assets. Compare that to the S&P 500 trading at a P/E multiple of 18.5 and P/B of 2.61. In fact, the three year trailing return of RSX is -5.64% ANNUALIZED while the S&P 500 put up 22% each year. WOW…this is the sort of stuff that asset allocation specialists with their dreams of mean reversion and low correlation live for.

That’s not just cheap, but CHEAP and remember, it’s CHEAP for a reason. Mostly because it’s one of the most corrupt and poorly managed countries on Earth where justice (when it’s available) is for sale to the highest bidder, no true political opposition is allowed and alcoholism has drastically shortened the life-span of most men. It’s like if Haiti and China could have a love child and that child was one of those sub-Saharan countries where the leading cause of death is listed as “warlord.” So nowhere to go but up right?

Personally I’m optimistic that the sanctions coming from the U.S. and Eurozone will have their desired effect and show Putin that this isn’t 1938 and that the Ukraine isn’t Czechoslovakia, but it’ll likely take more time for the lesson to sink in. Until then, the U.S./E.U. compact is going to continue targeting Russian financial institutions and as early as this Monday a new series of sanctions targeting oil companies controlled by the state to prevent them from borrowing in European markets could be proposed.

Why does that matter to you when the animal spirits are taking hold of the market? You’re thinking that high volatility=high returns and if it doesn’t, you’ll blow out after a 5% pullback? Well what are Russia’s primary exports? What’s the country famous for…vodka, bears riding motorcycles while drinking vodka and oil.  Hell, they just came out with their first locally produced smartphone last December.  China’s been making copies of the iPhone since Day 1.  Not impressive for a former superpower.   Lot’s of oil and among the few Russia market ETF’s, RSX has the lowest energy weighting at 41% versus 60% for the SPDR Russia ETF. So it’s probably safe to say that if the EU does agree to target Russian energy concerns, RSX could be moving back to new lows.

RSX Weekly
On the plus side, it doesn’t have that much further to go. Take a look at this weekly chart of RSX over the last several years I put together back in 2012 and you can see that we’re not far from long-term support at around $22.50 a share and what’s $2 between friends? Unfortunately, we have a downtrend line capping further movement at around the $26.80 level and forming a nice and VERY long-term descending triangle. It could take more time to play out, but the pattern is typically a bearish one and at the rate it’s forming the conclusion could take place between now and the first half of next year. So like I said, be ready to buy more when Russia becomes even cheaper.