Sunday Night Chartology: Special Champ Kind Edition

The Yinzer Analyst is on the road, so just a short post tonight because there was no way Friday’s Treasury bull slaughter could go by without comment.  The Treasury sell-off started with Friday’s Employment Report which was so far above expectations that even the most ignorant trader couldn’t ignore what we’ve been talking about for the last few weeks; that rates are going higher and the Fed isn’t even trying to hide the fact from you.  So why dig in and fight it?  But the sell-off in Treasuries and the spreading margin calls led to bleeding throughout the market as profits were taken, positions stopped out and heads buried in the sand.  The sell-off was so brutal we need Champ Kind to come in and moderate this one for us:

Let’s start with the carnage in the Treasury market where the ten year yield blew through the downtrend channel and pushed back to last December’s highs.  Maybe the 200 day moving average can contain it.

TNX

You can see a similar story for the 30 year yield although the sell-off wasn’t nearly as severe:

TYX

And finally Mr. TLT wasn’t feeling the love although he wasn’t the worst casualty by far on Friday:

TLT

That spot was reserved for the gold miners; whether on profit taking or the fact that a Fed rate hike will raise the lease rate and opportunity cost of holding gold (and cutting demand for the metal), the miners took it on the chin and blew through support at $20:

GDX

The possibility of a rate hike spilled over into the defensive yield trade where both REIT’s and utilities took it on the chin:

iyr

XLU

What about the Yinzer Analyst’s favorite trade in long European exposure?

EZUD

You can see on the daily chart that there isn’t a whole lot of support between $38 and $37 and after that we’ve got the upper boundary of the downtrend line at $36-$36.50 to provide support.  Looking at the weekly charts for a longer-term picture you can get a better sense of not just the support at $36 and change but how the uptrend might still be in it’s infancy (fingers crossed.)

EZUW

What about the picture for domestic equities? Using SPY for the S&P 500 you can see on the daily chart that the market was again denied while trying to breakout of the prior ascending wedge pattern leading to a retracement of the year’s meager gains but for now we’ve got prior support at the 50 day moving average at 206 and then nothing until the 202.5 level.

SPYD

Looking to the weekly charts, you can see we remain mired in another ascending wedge (bearish) pattern with more strong support at 205 level, so while the market might open down and drift lower we should expect more stickiness around that level.

SPYW2

Which is confirmed by looking at a weekly chart of the S&P 500 itself:

SPXW

But there were a few flowers blooming amidst the rubble on Friday and not surprisingly found in the financial sector.  The possibility of a summer rate hike has helped spark new life in a sector weighed down by the financial repression of a low rate environment.  With the possibility of higher interest rate spreads and loan growth through an expanding economy, return on assets might finally get itself out of the low range it’s been stuck in for the last several years.  But before you rush out to buy the bank stocks, keep in mind that regional banks are likely to see the biggest boost to EPS (and they outperformed XLF by 150 bps or so on Friday) and even Friday’s rally wasn’t that strong.  Two of the largest regional bank ETF’s (IAT and KRE) saw strong buying pressure give way to late afternoon selling as profit taking kicked in and pushed their one-day CMF scores into negative territory.  Hardly reassuring:

IAT

KRE

That’s all folks, now get out there and try to make some money!

Sunday Night Chartology

This Sunday night I thought we’d try something a little different here at the Yinzer Analyst; more charts, less chit-chat.  Maybe it’s the season affective disorder or maybe the death of one of my childhood idols but let’s be honest, if you’re reading this it’s either really late and you have a bed to get to or very early and you need to start planning your trades for the day.  We’ll save the deep posts for when you need them, but think of Sunday Night Chartology like Headline News with Robin Meade.  A mile wide and six inches deep.  All we need is a beautiful newsreader for the podcasts…any volunteers?

index

First up, let’s look at the broader market using SPY for the S&P 500:

SPY

SPY has broken out of the consolidation patter and even fought its way back into ascending wedge pattern but ran out of steam soon after.  Momentum has turned and Friday’s close at the low sent the CMF score lower.

SPYW

On a weekly basis SPY is still stuck in another ascending wedge pattern while momentum hasn’t confirmed a breakout strong enough to make me change my opinion on the strength of this market.  I wrote on Saturday that momentum has been slowly weakening since the great Tapering Announcement in December of 2013 and until something changes to add new life to this market, new highs might continue to be seen but the action will be more volatile.

SPX

What about domestics bonds?  Our last post was bond heavy so tonight we’ll just keep it brief with a chart of TLT:

TLT

While last week’s rally was enough to give some traders hope that a decent bottom was forming, I think it’s still too soon to get the “Mission Accomplished” banners ready.  The strong January rally had legs all along the $132-$136 range, offering plenty of opportunities for any rally to stall out.

And since it’s hard to separate bonds and the dollar in any discussion of the market this year, let’s move on to Uncle Buck (here using UUP):

UUP

On a short-term basis, UUP looks to be almost at the end of it’s consolidation patter and offering the possibility of another move higher this week, but moving to a long-term basis we see a different picture:

UUPW

Last week’s rally brought us right back to the old high and has me wondering how much more room is there to run for UUP.

And what kind of dollar conversation can you have without talking about gold and commodities?  Start with the MarketVectors Gold Miners ETF (GDX):

GDX

On a daily basis GDX found support along the 50 day moving average and close to prior support at $20, but will overhead resistance and the 200 day moving average keep GDX from running higher?  The weekly charts aren’t much more promising:

GDXW

Using DBC for our broad commodities benchmark, you can see on the weekly chart that the fund is fighting hard to get back into the downtrend channel that kept it bound for much of 2014.  Will a rising dollar sent it back to the recent lows?

DBC

It certainly hasn’t helped the recovery in the energy complex:

XLE

Or those countries heavily reliant on commodities for their financial well-being like Argentina:

ARGT

And finally, my two favorite charts showing the continued breakout of European equities versus the S&P 500:

EZUSPY

EZUSPYW

EZU has outperformed SPY by nearly 500 basis points this year and while the weekly charts show that the breakout could be in it’s early stages, the short-term daily charts makes it look like we could be entering a consolidation period for EZU relative to SPY.  You might see the fund lose ground against domestic equities, especially if UUP continues to gain ground against FXE.

See, we’re keeping it brief tonight here at the Yinzer Analyst.  Good hunting out there tomorrow people!

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.

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.

Sunday Night Recap: Can the Last be First?

Amidst the joy that comes from celebrating a winning season with a completely meaningless win for the Buffalo Bills, the Yinzer Analyst turns his thoughts to the opening tomorrow and those last few precious trade days before the start of a new year. There have been a spate of articles lately about how one man’s, or one year’s, treasure can become next year’s trash and to be honest, there’s a great deal of truth to that. Take a look at a Callan table and you’ll see there’s some logic to buying whatever’s been left behind but it’s not consistent. Buying the dogs of the DOW isn’t always a sure thing; check in on Sun America Focused Dividend to see where that got you in 2014. But that has us thinking that it’s time to check in some of 2014’s biggest losers to see how they’re setting up for a brand new year.

Can the Last be First?

First up, the biggest shocker for the broader equity market came from energy stocks; from Jan 1 to June 30th, the Energy Sector Select SPDR (XLE) was up 14.18% versus 6.95% for SPY. Since then, XLE has come crashing down 19.06% as West Texas Intermediate Crude broke down nearly 47% while SPY has chalked up a further 7.59% gain. XLE has firmed up since hitting the 200 day moving average although it has yet to break through the downtrend lines that have held the weekly chart pattern in a downtrend channel since this summer. Currently sporting some of the lowest price-to-earnings multiples to be found in domestic stocks, how long will it be before the can breakout?

XLE

As long as we’re on the subject of hard assets, how about equity precious metals, down 13.11% YTD as concerns over rising inflation become a thing of the past. The Market Vector Gold Miners ETF (GDX) showed signs of life last Friday as the potential for more stimulus in China helped spark a rally for the miners although the technical outlook has been improving for the sector over the course of the month. The miners have broken above the summer’s downtrend line and have spent most of December consolidating but have yet to break through the 50 day moving average or move beyond the longer-term downtrend line you can see in the weekly chart. Speaking from personal experience, until it can close above the 2012 downtrend line, any rally for GDX should be treated warily.

GDX

GDXW

And you can’t talk about gold and oil without talking about Russia, so let’s check in on the Market Vectors Russia ETF (RSX):

Ever since bouncing off $12 close to the 2009 lows, it’s been nothing but up for RSX but remember how quickly this can all turn around. Since 12/17 RSX has moved up 15.98% on….well I’m not really sure. Could it be the promises of China to help bail out Russia if it needs it? The lack of further sanctions? Simply closing out of short positions to reinvest closer to home? RSX may have cleared the steep downtrend line dating back to late November but still has to face to the 50 day moving average and the gentler downtrend line from last summer. Until it can get above that, I’d be very cautious about adding Russian longs.

RSX

And as long as we’re overseas, let’s wrap up this discussion by focusing on the China A-shares market where it’s been nothing but profit since coming close to a double bounce of multi-year lows this spring. It’s been a strange pattern since then;

ASHR

the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) has a nearly parabolic advance then cools off to consolidate and digest the recent gains. Then it’s rinse, wash and repeat. It looked like ASHR was going to do more than consolidate this winter but the recent rise in speculation that the PBoC will cut reserve requirements breathed new life in Chinese equities. For now ASHR is stuck in a trading range and consolidating recent gains and while the daily chart may not show overbought status, the weekly chart sure as heck does.

Europe:

So what about the Yinzer Analyst’s favorite investment, Europe, in 2014? While I still think the U.S. will stay the core of my own portfolio until proven otherwise, I think investors need to put more focus on diversifying their portfolios next year, especially with SPY up 15.45% annualized over the last five years versus 2.81% for the iShares MSCI EMU ETF (EZU) and 5.5% for the iShares MSCI EAFE ETF (EFA.) With such strong performance, why would anyone want to see “performance drag” from investing in anything other than U.S. equities? Performance catastrophes usually start off with logic like that.

So is the Yinzer Analyst still optimistic heading into year end? First on a weekly basis EZU has managed to get back above its summer downtrend line on better volume although it still has to challenge overhead resistance around $39.

EZU

What about compared to the S&P 500? On a daily basis, the relative momentum has been bottoming out for nearly two months now although EZU began weakening as it pushed towards the relationships’ 50 day moving average. On a weekly basis you can see that while the relative momentum hasn’t gotten any worse, it sure hasn’t gotten any better. Until it can break out of the downtrend line, domestic equities are still the “safer” bet in 2015.

EZU3

EZU2

Domestic Equities:

But what about domestic equities? Are they still the sure fire wager in 2015 that they have been five years into a bull market? Continuing to focus purely on technical, you can see that the S&P 500 has finally pushed above its consolidation range but did so on very weak holiday volume and giving us essentially a neutral CMF (20) score and a notable divergence from the price trend. Given the number of managers underperforming in 2014, I wouldn’t be surprised if the action stays quiet over the next few days with the market only showing a major trend change on Jan 2nd.

$SPX

But speaking of trend changes, the sector to watch continues to remain the healthcare sector. Despite the relatively weak price action in the second half of the week, XLV remains firmly entrenched in a relative momentum uptrend channel that formed in early 2012. The question remains whether the recent weakness in Gilead will be enough to derail the entire sector and send it lower in 2015.

xlv2

xlvrelmom

Sunday Night Recap: Don’t Become a Victim of Regime Change

The first step in avoiding a trap is knowing of its existence –
  Thufir Hawat, Dune

While the above quote from Frank Herbert’s “Dune” may be one of the most used by investors and bloggers everywhere, actually following the advice is much more difficult. After all, what can you do to avoid the most common pitfalls the befoul investors when they’re in your own mind. In “Dune” Thufir Hawat is a mentat, a man whose nervous system has been adapted to processing and analyzing vast amounts of data. Relying on statistics and logic, he’s ultimately defeated by an inability to understand human sentiment and the depths an enemy will go to defeat you. Like the good mentat of the novel, you need to study your data carefully but remember that the human mind can struggle with data and often arrive at false conclusions.

One of the most power facets of human behavior in general is the need to “know” what the answer to any or every question is. Lazy journalists and their social media successors have relied on this for sales and ad revenue for years. The S&P 500 was down 3.5% last week and investors big and small are trying to determine why. Some will say a lack of confidence in Europe, others will say spillover from the energy sector is leading to profit taking elsewhere. It could be year-end asset reallocation or political concerns in Russia, or anything you want it to be. But the human mind is programmed for pattern recognitions; it was one of the great survival tools of our species, the ability to look at an event (say a lot of picked-over bones outside a dark tree line), find clues (large animal tracks), and draw a conclusion (something big is in there, stay away!) Today it persists in the need to look at an outcome such as a strong market drop and determine why or how long it can persist for.

As the computing power of our machines has begun to outstrip that we were born with, our ability to process data has increased exponentially, but if your data or process is flawed, so are your conclusions. As an example, I was updating my momentum tables this weekend and trying to come up with what I call “left field” trade ideas when I noticed that Energy Sector Select SPDR (XLE) was trading a level that I never thought possible. Using a short-term range of 5 to 30 days, XLE’s momentum is so low that round it up to the .01% is actually overstating its case. Compared to its prior history, it’s not just cheap it’s CHEAP. On a long term basis (1 to 5 years) I went out ten decimal points and still could find a number above zero. Saying XLE is hated would be understating the case.

Looking at the chart for XLE, the selling pressure hasn’t reached the level of last October but getting very close to it. Having taken out prior support at $75, you can see additional support at $72.50 and then $67.50 that might prove to be the final stopping out point. The question is who is brave enough to try buying there. Given the flood of negative sentiment, most people won’t even consider it. But remember how negative the sentiment was on the real estate sector in 2009? Everyone though they would collapse completely and instead over the next five years ending 12/12/14 they’ve outperformed with the Vanguard REIT ETF up an annualized 17.53% compared to 14.88% for SPY. Or how about Treasuries in late 2013? The iShares Barclays 20+ Year Treasury Bond (TLT) ETF is not up over 27% YTD, nearly 3x the gain of the S&P 500 TR.

What happened?  In a nutshell, there was regime change. At the heart of quantitative finance is a paradox; practitioners rely heavily on statistical theory and the assumption that data is stationary or that the relationship between two variables remains stable and unchanged over time. If variable X changes by so much, it will cause a certain change in variable y and do so consistently over the time frame in question. However, financial data is widely known and understood to be non-stationary; relationships between variables are in a constant state of flux and achieve stability for only limited periods. Despite the tools and techniques to model this instability, at its root, the market is a pool of humans (and increasingly machines) constantly updating their outlook based not only on new data but a change in sentiment which is something machine learning has yet to master. Why do I go into this now? Because I’m curious whether a regime change is about to happen to the S&P 500.

Regime change has already been taking its toll on the performance of active managers in 2014, just look at Good Harbor. The Good Harbor Tactical Core (GHUAX) Fund relies on the asset switching model they developed to rotate between equities and bonds and within equities between large and small cap ETF’s and uses leverage to enhance returns both by leveraging up longs or through inverse positions. During years like 2013 where equities consistently outperformed bonds, firms like Good Harbor can do very well for themselves and pull in a lot of assets, but 2014 has been hard on them. The constant rotation in leadership between equities and bonds in the first half of 2014 along with the consistent underperformance of small caps versus large has left GHUAX down 23% this year and GHUAX, while only a small part of GH’s overall business strategy, has seen assets drop nearly 40%.

GHUAX

The basic logic behind my own momentum model (or anyone’s really) is to identify levels where a security or index can be expected to out or underperform and to develop a trade strategy around it. Basically if short term momentum scores reach a certain low point, a positive return can be expected over a certain time frame. Looking at the S&P 500, momentum scores are close to the lows they set in early October and before St. Louis Fed President Bullard made his comments about changing the timing for ending QE3 that sparked a new rally. My first reaction was to say that equities should be due for a bounce soon that could push us back to the old highs but after creating a few charts my view has begun to evolve.

When I looked at my charts, I noticed that the short term scores haven’t been this low since early October of 2014 and before that February of 2014 but the more interesting discovery was that they really haven’t been this low, this often, since August of 2011 to May of 2012. It’s a document fact that momentum, like volatility, has a tendency to persist for long periods or put more simply, winners will keeping winning for much longer than you can expect. During the period of 8/11 to 5/12, the 30 days return after a hitting a deeply negative score just as often saw negative or at best breakeven performance compared to strongly positive performance in the period both before and after that. Likewise, very strong scores often saw positive performance rather than negative as short rallies cooled off. In other words, there was no consistent relationship between the momentum score and the subsequent return. A similar relationship existed for several months in May to August of 2010 and before that in the 1st quarter of 2009. After May of 2012 the situation changes; deeply negative short term scores saw very strong performance and typically only when scores were at their peak was there a minor pullback of less than 5%. Putting it simply, if you bought when momentum was strongest you might have suffered a small 1% to 3% loss over the next thirty days, but if you simply bought the dip, you made it all back and then some.

What was the likely culprit behind these regime changes? Well consider the only major outside variable, the main driver of equity market returns, over the last five years; the major sentiment boost provided by the Federal Reserve. Take a look at the charts below. QE1 was announced in late 2008 and ran from 12/08 to 03/10 and was followed by a period of weakness when rumors about QE2 began. QE2 ended with a serious market pullback and after a summer of rumors about QE3, the FED unveiled operation Twist II choosing to hold off on unlimited QE until the summer of 2012. After that the rest was history. Why didn’t the market break down further in 2013 when the FED got serious about ending QE3 in 2014? Because it was year-end and no one wanted to sell their positions after such a strong year. Now with heavy volatility and weak performance, investors can’t wait to sell their positions to lock in what gains they may have which could explain the weak performance across nearly all sectors and broad domestic equity markets last week.

QE1QE2

So why is it different now? Because the Fed has been signaling from the summer of 2013 that is very concerned about the effects of low interest rates on risk taking behavior and wants to return to traditional practices as quickly as possible and with the recent performance of the dollar and its impact on commodity price inflation, the Fed now has the cover it needs to wrap up their asset purchases without ever having hit the 2% inflation target. And now, Vice-Chair Stanley Fischer has confirmed that discussions are on-going about dropping the language committing to keep rates low for an extended period as soon as this week’s Fed meeting. Remember, the FOMC may believe raising rates will help increase velocity of money and raise spending because once rates begin to rise, investors will feel more confident that rates won’t rise more. Think about it this way; the pool of investors (individuals or institutions) who sit on cash because they won’t suffer a capital loss from duration if rates rise will feel more confident after the Fed Funds rate goes to .5% or 1% because they think a future rate increase is less likely. The Fed is hoping that the established positive correlation between interest rates and velocity holds true in the future.

Maybe the markets are right to be anxious about the coming end of QE3 after all. In the meantime, maybe it’s time to stop and think about what traps you might be setting for yourself.

Weekend Recap: Time For Dividends Again?

This weekend has not been kind to the Yinzer Analyst. First someone accused him of being “funemployed” and when he had to look it, he felt even older than usual. Then hours were spent raking leaves before capping the fun parade off with the NY Jets breaking their losing streak by beating the Pittsburgh Steelers. This is serious people, it’s like if France ended its streak for military defeats by taking on America and not only winning, but making us all eat a big block of Limburger cheese while singing the Marseilles. So it’s a perfect time to turn to the markets to provide some hope and solace in this dark hour for Yinzer’s everywhere.w1IlmWy

Market Re-Cap:

If you were watching the tape this week, you could be forgiven for thinking the clocks got set back a little too far like to last July. The volume wasn’t much greater this week then it was then and the spread between the high and the low for the week was the narrowest it’s been since the beginning of September. While it’s tempting to simply write this off because we’re finally past the old highs and the market’s climbing the wall-of-worry, this is a good time to take a look at the internals to see how much juice there might be to push up higher.

Breadth:

Let’s start by looking at the market breadth and being a simple yinzer, I like to keep it simple by checking out a few choice charts. The first are the % of S&P 500 stocks above their 50 and 200 day moving averages. You can see that we’re right back to levels where the market has typically found itself running out of steam. It doesn’t necessarily mean that anything bad is about to happen, just that the powerful move from October 17th to November 9th consumed a lot of energy and the rally has entered a late state. The next chart is the ratio of new highs to new lows and here we can see a clear divergence. Utilities and energy stocks had 1% days on Friday, but that wasn’t nearly enough “umph” to help keep the rally alive, especially in the face of strong selling pressure in the healthcare sector.

SP50

sp200

SPYHILO

Why the pressure in healthcare? While it’s always tempting to say “profit taking” the healthcare sector is probably the most sensitive to political issues and with the Republican win on Tuesday night, another round of votes to repeal the Affordable Care Act are sure to be in the offing early next year. Concerns over the ACA helped depressed P/E multiples for several years until the Supreme Court decided the issue and those old fears are coming back to the fore.
So all in all, breadth is okay, not fantastic.

Sentiment:

The most widely followed of sentiment surveys, the American Association of Individual Investors Sentiment Survey showed bullishness at the highest levels of 2014…in fact we’re right back to the highs seen in late December 2013 before the market went exactly nowhere for 3 ½ months (but in a really erratic and volatile manner.)  More from Marketwatch here. MW-CY543_optimi_20141106134122_ZH

Technical:

Now after one of the strongest rallies in years; the S&P 500 can be forgiven for needing to take a breather and there’s strong support just below us around the $201.50 level. After breaking through to new highs, it would be surprising if the S&P didn’t need to stop and retest prior resistance. But fingers crossed it doesn’t break through this level because there are a whole bunch of gaps that needed to be filled after this advance.

spy

As we talked about last week, the picture for small and mid-caps is mixed. After closing the week of October 27th with a x.x, this week confirmed the weakness with a back-and-forth action that ended with a measly .13% gain and a potential hanging man pattern (we think, looks a lot like the hammer) indicating that there might be more weakness ahead.

IWM

Dividends and Bonds:
In fact, for the first time in a long time, bonds pulled it out of the fire on Friday and racked up some very impressive gains with TLT up 1.15% on the day as the “Search for Yield” continues.  And check out the long-term chart of the ten year bond yield; it just keeps walking down the 2007 downtrend line as if it was drawn to it like a magnet. But doubt remains as to how much of it is yield seeking and how much is defensive buying although we’ll grant you that one doesn’t necessarily exclude the other. High yield bonds (using HYG) lagged this week after putting in a respectable month as doubts about the future of corporate earnings in a reduced-deficit, no Fed easing world persist.

tlt

ten year yield

Back with equities, dividend payers continue to rack up points both in the broader equity index ETF’s and in the sector plays with defensive names like consumer staples and utilities outperforming their more cyclical inclined brethren. REIT’s lagged although some of this must have to do with the fallout from American Realty Capital. But this brings me to the second thrust of this article, “Are Dividends Cool Again?”

Show me the Money!

If there’s been one sector that surprised all forecasters with its performance in 2014, its utilities where the Utilities Select Sector SPDR (XLU) began outperforming the broader market in January and now is up 24.99% YTD versus 9.93% for the S&P 500. According to Factset, in the third quarter, the utilities sector saw their earnings grow 2.8% compared to the broader market’s 7.6% and while the market typically doesn’t reward the sluggards, in this case it’s made an exception. If earnings are going to be more important going forward, why are utilities outperforming so handily in 2014? Partly because among the companies that have offered forward guidance, their expectations for future growth are among the most stable.

So far 55 companies have offered negative guidance versus 18 with a positive outlook for the next quarter. The spread between positive/negative outlooks is of skewed with tech stocks having the widest ratio (7.5X) while the lowly utilities sector has only one name offering forward guidance and of course, it’s positive. Given that analysts have trimmed their 4th quarter earnings forecasts since the end of the 3rd quarter by 53%, this stability clearly offers a lot of attractions in this brave new world without a backstop from the Federal Reserve but it comes with a heavy price. Factset now estimates that utilities are the most expensive sector based on the 12 month forward P/E ratio. While this strong performance, along with that of REITS was attributed to either annual sector rotation or a quest for yield, the Factset Earnings Insight Report leaves little room for doubt that consistent earnings and expectations for more of the same are also playing their parts.

While the financial sector theoretically has the third highest earnings growth this quarter at 16.4%, according to Factset if you removed J.P. Morgan it would drop to 2.8% putting it in-line with the utilities and even with a 5/4 positive to negative announcement ratio, investors aren’t feeling too generous to the banks. Continuing uncertainty over future lawsuits and settlements including the FOREX scandal has led to more cash hoarding to build up reserves while also lowering investor optimism. Factset’s 12 month forward p/e estimate for the financial sector is currently 13.5, the lowest for all the sectors of the S&P 500 and that’s been weighing heavily on some ETF’s offering a focus on preferred stocks in the financial sector such as PowerShares Preferred Portfolio (PGX) and iShares S&P US Preferred Stock Fund (PFF) both making the short list and offering dividend yields in excess of 5.5% compared to the 1.8% offered by SPDRS&P 500ETF (SPY).

For now, dividends are back on top!

INT

DOM

SEC

Bond

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.