Sunday Night Recap: Is Uncle Buck heading for Trouble?

So after all that hype and weeks of build-up, are you as disappointed as I am? FOMC Minutes, Greek debt extensions or the very lame Neil Patrick Harris, the let-down is the same.  At least in Europe you might see the finance minister of Greece start a fist fight.  The Fed continued its policy of non-enlightenment while the Syriza party pulled back from the brink of the abyss and went back to Frankfurt with their begging caps in their hands. Everyone is focusing on the big win by the S&P 500 this week that put it to a new high, it was the announcement that Greece have caved in on most of their demands that gave the market the boost it needed and my preferred European etf (which I am currently long) still managed to strongly outperform on the week. While the Yinzer Analyst is wondering if he can pull a Harry Crane and ride one good idea to wealth and fame, the strong performance by European funds (especially the unhedged variety) has me wondering if a bigger change is about to come to the market.

Chartology:

Starting off here at home, it was another big week for the S&P 500, not only setting a new high but breaking through recent resistance in the process. For me, the big question is how convincing of a move was it? The market was flat on the week heading into Friday and it was only on the rampant speculation of an impending deal with Greece that gave it the spark it needed to close about the 2100 level and even then it was on weaker volume. While the weekly CMF score rose on a close just off the high, momentum hasn’t confirmed the breakout. Janet Yellen’s testimony this week could be what it takes for resolution one way or the other.

SPX

Investors look for resolution from the FOMC will have to wait till March as the release of the meeting eventually rise, yes but the FOMC is on a “data dependent” path which means the chances of them sending YOU a big signal in their commentary is pretty low. After a brief one-day pop on Wednesday, TLT struggled for the rest of the week but managed to close outside the downtrend channel and above prior support. The question now is can it stay there?

TLT

The real excitement this week was in Europe where the complete abandonment of the hardline stance that dominated their election platform by the Syriza party was met by a resounding chorus of “I told you so” by literally everyone everywhere. At least that’s how it seems but hindsight is 20/20. While volume dipped this week, the iShares MSCI EMU index had another strong week and pushed right into the 50 week moving average. Negotiations between the troika and Greece will continue on Monday and if a deal can’t be reached another meeting of the ECB finance chiefs will take place Tuesday. Volatility will be the order of the day.

EZU

Dollar Doldrums?

Now what really has me interested is what happens later this week after we have a six-month extension in Greece and Janet Yellen magnificently demonstrates the ability to answer questions without saying anything. After the rout in Treasuries this year I think you would be hard put to find anything as potentially “overvalued” as the U.S. dollar. Thanks to a combination of factors including the winding down of QE3, existential uncertainty in Europe and higher risk-free rates, Uncle Buck enjoyed a hell of a run in 2014. Here I’m using UUP and FXE but it’s hard to find a currency the dollar didn’t decimate last year.

UUP

FXE

But what’s interesting to me is that regardless of when the debate over when rates might rise first heated up here at home, Uncle Buck really began losing steam on February 1st, the first trading day after GREK hit its lowest point following the election that brought the Syriza party to power. February 1st also marked the day that the January Treasury rally finally cracked as the S&P 500 bounced at 2000 and the risk on/off switch decisively switched to “on.” Besides Treasuries another casualty of the risk on trade has been the U.S. dollar which of course means that the Euro (and most other major currencies have been gaining ground) versus the buck.

Now my inner conspiracy theorist says that Janet Yellen and the rest of the Fed are of course secretly thrilled by this. The major increase in the dollar has dampened inflation even as the domestic economy showed signs of heating up, putting the Fed in an unenviable position. Do they raise rates even though GDP growth is likely to only be in the 2.5% range and while the global economy continues to sputter or do they risk higher inflation down the road? If the dollar continues to lose ground and commodity prices begin to stabilize, personal consumption expenditures will likely weaken as real disposable incomes stagnate but the Fed won’t have to pull the interest rate hike trigger in the near future. As much as the Fed hates the current status quo, I think it’s just as terrified by the thought of what could happen when interest rates finally do rise. They don’t want to repeat the mistakes of European leaders in 2011 when they raised rates prematurely and killed their nascent recovery and helped sparked the crisis of 2012.

So if Uncle Buck does continue to slide, could it mean that commodities might finally be able to stand their ground after so many difficult years? It’s way too early to speculate but now that every institutional investor has stripped out their commodity bucket and dumped it into U.S. equities, who’s left in the market? Could we see the beginning of a new bull cycle?

DBC

Now it’s time to get back to the Oscars and see if Neil Patrick Harris can finally land a joke. Good hunting out there tomorrow.

Reading Between the Lines of the FOMC Minutes

The Yinzer Analyst has been on a journey these last few weeks; first a series of interviews with firms in Pittsburgh and beyond and then a journey of self-discovery, learning more about himself, plumbing his depths and mostly discovering how much he hates shoveling snow every freaking day. I’m sorry it’s been so long since the last post, but after a powerful two week rally and with volatility dying down before tomorrow’s FOMC minutes release, now seems the time to get back in the swing of things and take the pulse of the market.  And tomorrow is also Ash Wednesday; a perfect time to stop and reflect on what’s going on around us and what lessons we could be taking in but one nice thing about coming back after two weeks off is getting a chance to revisit my last post and see if my charts came to anything or not. And this week, the Yinzer Analyst is doing a serious victory lap.

In my last post I talked about how the market seemed to have reached new extremes; Treasury yields had plummeted in January and were at levels not seen even at the worst of the Lehman crisis while domestic equity momentum was close to the lowest levels of the 2009 bull cycle. As much as I hate using labels like Treasury Bear/Equity Bull, I had to face up to the fact that yields had dropped way too quickly and were more likely to move higher while equities were likely to continue consolidating around a sticky level of 2030. The thesis behind that logic was simple, I like to call it my “Cleveland Brown” system because it’s so simple that anyone can get it…”S$%T got too damn expensive.”

Since that post, TLT has dropped 8.5%, going from overbought to nearly oversold in two weeks while sisters in the “hunt for yield” trade like utilities (XLU -6.6%) and REITS (IYR-1.42%) followed it and the S&P 500 made a 5.28% gain. Let’s start our investigation by looking at the extremes and in February, nothing has been more extreme that the major shift in the sentiment towards Treasuries.

We asked the question then of whether Treasuries had come too far, too quickly and we got it right almost to the day. After plunging in January, the ten year yield has not only pushed its way back into the 2014 downtrend channel but is threatening to break out of it to the upside. The thirty year yield is telling a similar if not quite as extreme a story.

$tnx

$TNX2

So what gives? Is this all due to the major shift in equity sentiment that began in late January? Wasn’t it just last month that “global deflation” was the buzz word everyone was spewing? While there’s been some improvement in the economic outlook in Europe and here at home, it certainly hasn’t been substantial enough to completely erase the “global deflation” scare. Or was it the fact that the economy is still on enough of a solid footing for rate hikes to be a serious concern later this year?

The answer is that human sentiment or if you prefer, behavioral finance, has more to do it with it than anyone would really like to admit to. I remember in 2013 the conversation was “well of course rates are going up, so get out of Treasuries (or bonds all together)”, then 2014 it was “well rates are going up, but we don’t know when so it’s back to Treasuries” and so far we’ve had both extremes in 2015. I know one local manager who in mid-January decided to REDUCE duration because he felt rates had come too far too quickly and got an unholy amount of S$#T for it. Guess who’s laughing now?

But the problem for us now is to figure out whether Treasury yields have gone too far in the other direction and what that could mean for the equity outlook going forward. For the technicians let’s start with a few charts.

Starting with TLT, we’re back to prior support but there doesn’t seem to be any sign of a momentum reversal in the immediate future. We could continue drifting lower back to the $122-$123 before a base begins to form. Moving to long-term charts, TLT looks like it could have been in a classic “bump and run” formation meaning a move back to prior support at $122.50 or even below that at $120 could be a best case scenario. But what it could really mean is that the worst of the bond sell-off might already be behind us.

TLT

TLT2

Moving to equities, the S&P 500 has gone from some of its worst momentum readings since the start of the bull cycle to some of the strongest of at least the last year. Given how weak equities have been over the last few months, we would just drift and consolidate for the next week or two and allow some of the buying pressure to cool off which has already been dissipating. Look at the weak volume since the start of the rally; the improving CMF score was more about weak days dropping off than strong buying pressure pushing the market higher. Again, I have to wonder if the best has already come.

SPXD

SPXW

Going to a fundamental case on bonds, the battle royale is going to be between economists who feel that there’s a strong likelihood for a rate hike as early as this June and traders who continue to hold large Treasury positions because they feel the Fed will use the weak global economy to justify holding to the ZIRP for even longer. Fortunately tomorrow’s release should shed some “light” on the Fed’s thinking, but given the surge in imports and personal consumption, the economists “might” be right this time.

One of my major mistakes in my past life was confusing what I thought the Fed should be doing with what they were actually signaling their intentions were and while it’s an extremely common fallacy among financial professionals, it doesn’t absolve me of the sin. While the Fed’s statements and commentary will remain obtuse because their function is to obscure, investors need to keep an eye on a few key trends that should determine how likely the Fed is to raise rates:

  • Value of the Dollar: As long as Uncle Buck stays strong and keeps commodity prices under check, the Fed should be reluctant to raise rates. Long-term, the textbooks say that the difference in interest rates should lead to a falling dollar and eliminating any arbitrage opportunities, but it could take years for that to adjust. What’s more likely is that after the initial run-up in rates, Treasuries could stay attractive relative to low global yields and led to a further run on the dollar as more money finds its way to our shores. Worst case, you could get a mini-repeat of the mid-2000’s where foreign credit flooded the U.S. and helped fuel the housing boom…and bust.
  • Real Incomes: As inflation remains low and commodity prices continue to fall, real disposable incomes have continued to expand even while the average workweek and take home pay have remained static. Real DPI in 2014 increased as its fastest rate in December and was up 2.3% in 2014 compared to -.3% in 2013. With unemployment already low and U-6 falling, the Fed is terrified that this increased in real DPI will get translated into more consumer spending and rising imports (a real possibility as the value of the dollar rises.) Personal consumption expenditure contributed more to GDP in 2014 than in any year post-Lehman while the Federal gov’t almost added to GDP for the first time in years.
  • Employment: Seems like a no-brainer to keep your eye on unemployment, but with the headline number falling steadily over the last few months, the FED might become reluctant to raise rates right away…especially with a rising participation rate. If more workers come back into the workforce just as the FED raises rates to slow economic growth, the unemployment rate could skyrocket and cause a major credibility crisis.

Tomorrow every trader in the world is going to be picking through the FOMC meeting minutes looking for clues including comments about those three bullet points above to figure out which way the FED might be preparing to tack. And a lot of traders are putting their money where their mouths are, look at the chart below from the COT Report; open interest in the 10 year has fallen and the rally in January led some to close out short positions but with a whole lot of nothing between tomorrow and the March meeting, why would you want to have a strong position going either way.

COT

So if the FED keeps up the chatter and the market comes away with a strong belief in a June rate hike, we could see more selling pressure in TLT. If Yellen doesn’t really deliver anything new, the market will turn its focus back to Greece and TLT could get a chance to bottom out.

What does that mean for you patient investor? It means get turn on Bloomberg, get out your red pen and be prepared to go through the transcripts with a wary eye!

Super Bowl Sunday Night Recap

It’s true, the Yinzer Analyst loves the Super Bowl and for the simple reason that there isn’t any other event as “American” as the Super Bowl. You all know the Yinzer Analyst loves his Buffalo Bills, but the Super Bowl isn’t just a showcase for a sport only played in America (and our close cousins to the north), but announcers who are way too busy talking and not listening, commercials where the combined cost for air time could feed a small country for a year and a half-time show that features a typically “has been” celebrity lip syncing to their favorite hits while wearing a skimpy outfit. And here in America, the roads are empty as we all stay home to enjoy the spectacle and hope for another wardrobe malfunction.

All I have to say is “Merica”

america-super-bowl-win-eagle

Speaking of America, with January closed and in the books, let’s take some time to look at the charts and see what February might have in store for us.

Swan Song for Domestic Equities:

Starting with the S&P 500, Friday’s close at the low pushed the market out of the consolidation pattern while the heavy volume and declining PPO score confirm the broad weakness we’ve talked about for a while now. Barring any major surprises with earnings this week; it’s likely that the market will bounce back into the consolidation pattern although how far it goes is debatable.

SPXD

Now check out the weekly chart; the market broke the first support line but only barely and given the prior resistance in 2014, it’s likely that the break lower will be “sticky” with a lot of volatility around this level.

SPXW

Finally, check out the monthly chart where the January close was the closest we’ve come to a 2/10 simple moving average crossover since last 2012. I’m a firm believer in respecting when the 2 month simple moving average crosses the 10 as a signal for market weakness even though the last two instances only indicated a brief pullback. Those crossovers happened on uncertainty and strong two month pullbacks in the early part of the bull cycle while if it happens in the next month or two, it’ll be much more like the crossovers in 2000 and 2007; several years into a bull cycle and after a period of relatively stable prices. We’ll have a special posting on this later this week, but for now keep your eyes on the long-term charts.

SPXM

Playing in the Alt Box:

Sticking with the broader themes, take a look at these charts of the ten and thirty year Treasury yield to show you how nuts January has been. Last week’s 7.82% drop for the ten year was only the icing on the cake for a month that saw it drop 22.81%! Seriously, not a typo. How nut’s is that? Even a move back to 1.9% would only put the yield right back into the downtrend channel.

$TNX

Check out the thirty year yield, which tells a similar but slightly more horrifying story as the yield is now below the lows of the 2008 financial crisis. The global hunt for yield in a world worried about deflation has the 30 year yield only slightly above what was historically considered to be the rate of long-term inflation.

TYX

How much lower can it go? Maybe a better question is how willing are you to go long on TLT at these levels? While I’m not a Equity Bull/Treasury Bear, you have to wonder about how extreme the situation has become.

Finally, a daily chart of the MarketVectors Gold Miners’ ETF (GDX). After a strong Friday that put GDX up 2.5% for the week, the fund would now seem to be decisively above the $21.90 level but I’d like to see a push back to $23 before giving my heart back to GDX. There’s a lot of heartache there for me.

GDX

Foreign Stocks Finally Finding some Love:

Staying with broad strokes, the Yinzer Analyst’s much loved EU equity position (using EZU) had a relatively good week compared to the S&P, but still hasn’t broken out of its descending wedge pattern although momentum, using the PPO, does look to be improving and has turned slightly positive. On a relative momentum basis, EZU had a HUGE week; after all it was up .36% versus a 2.77% loss for the S&P. That was a big enough gap to shot EZU clear out of the relative momentum downtrend channel.

EZU

ezu-spy

The action wasn’t just confined to EU equities as broader MSCI EAFE (here using EFA) also blew out of a sharp downtrend channel that began last summer. The question to ask is whether this breakout is going to be short lived like that in late 2012. EFA has a long way to go to challenge the relative momentum downtrend line that formed all the way back in 2009!

EFA

Nothing But Love for REIT’s?

Getting back to the good ole US of A, where on the surface things aren’t looking so solid but diving under the hood shows some interesting changes happening. First, let’s start with the healthcare sector, one of the strongest performers of this bull cycle and now nearly 15% of the S&P 500. After Friday’s close, XLV has cracked its 50 day moving average twice in January with a clear weakening of momentum.

xlv

On a relative basis, XLV still had a better week than the broader market but not by much and looking at the relative momentum chart you can see that while XLV is still in its dirty uptrend channel versus SPY, it has been hugging the lower boundary for some time now.

xlvspx

What’s worse is #2 sector financials have had a disastrous month, down nearly 7% compared to the broader markets 3.1% pullback. Check out the relative momentum chart where you can see that major beating the sector has taken this month; after a strong second half of 2014, XLF has utterly given up and is about to fall out of its momentum channel. But with XLF about to hit itss 200 day moving average, can it find the spark it needs here to stay in the game?

XLF2

XLF

Finally, let’s wrap it up with the number on sector in January, real estate investment trusts which KILLED it with a 5.71% gain for the month but Friday’s close has the Yinzer Analyst wondering if the worm is about to turn. The weak showing led IYR to cracking it’s uptrend channel and while the relative momentum channel versus the S&P 500 is intact for now; when you’re sitting on 5+ years of strong gains (200 bps of annualized outperformance over the last five years) you start to wonder if you’re going to be the only one left at the party when the music stops.

IYR2

IYR

And with that, it’s half way through the 4th and the Patriots are finally starting to show signs of life so it’s time for the Yinzer Analyst to get back to the game. Happy hunting out there tomorrow.