Daily Market Commentary: Bullish Engulfing Patterns

Markets opened weak but were able to make back lost ground and then some. The S&P confirmed a breakout from the downward channel on heavier volume (but light volume compared to what's gone before).

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The Nasdaq offered a sizable bullish engulfing pattern, without the higher volume accumulation, but with enough juice to outperform the S&P (on a relative basis).

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Nasdaq Breadth continued to improve with a MACD trigger 'buy' and a rise in stochastics from oversold conditions.

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While the Percentage of Nasdaq Stocks above the 50-day MA shifted technicals net bullish after stochastics crossed the bullish mid-line.

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Small Caps also cracked out a bullish engulfing pattern as it hugged former support higher. Since early February Small Caps have been outperforming Tech, and Large Caps since mid-May. As the leading index it should be favoured by buyers.

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With a number of bullish engulfing patterns appearing in different markets - albeit weakened by the lack of an oversold market (so they are not a slam dunk) - there is a good chance for some upside follow through tomorrow. As for support, the Nasdaq and Nasdaq 100 were able to lean on 20-day MAs following morning weakness. While the S&P defended its 50-day MA. Stops can be trailed on a break of these key averages.

What Do Oil Insiders Know That You Don’t? Producers, refiners selling crude futures at a breakneck clip

If you own a lot of energy stocks, you’re not going to like what I have to say, but I suggest you hear me out. I think we’re getting close to a significant downward reversal for crude oil, which obviously would not bode well for oil stocks.

Heresy! How can oil prices fall with fighter jets screaming over Libya and pro-democracy uprisings in petroleum-producing countries like Yemen and Bahrain?

Well, think about the other side of the story. Why do you suppose crude has soared from $85 to $105 a barrel in the span of just a month? Isn’t it precisely because of all those suspenseful geopolitical events?

Let’s imagine for a moment, a world without Khadafi. It may not be that far off. With the colonel out the door, and a democratic Libyan government in place, I could easily envision a $20-plus drop in oil since Japanese energy demand has fallen off sharply in the wake of the earthquake/tsunami. If crude were to buckle, oil stocks, currently at the top of the standings for year-to-date gains, would take a header, too.

Technically, the oil market is ripe for some kind of “correction.” In recent weeks, the insiders of Big Oil — producers , refiners and other commercial interests — have been selling crude futures at a breakneck clip.

As of last week, the commercials were net short 310,000 contracts. Before this year, that figure had never exceeded 200,000. So the big boys are unloading at a rate far above normal. Do they know something the frantic “energy experts” on CBNC don’t?

I’m not advising you to dump all your oil stocks. However, I think it’s a good time to reassess your holdings and trim those of marginal quality.

One oil stock I recommend selling is Russia’s Lukoil (OTC: LUKOY). LUKOY has more than doubled from its lows during the October-November 2008 panic. Yet operations have stagnated, with production down almost 10% in the past four years. Thanks to the ebullient oil market, investors can now make a graceful exit.

In addition to LUKOY, I would sell Chesapeake Energy (NYSE: CHK), which has soared almost 60% since last November — an unsustainable move, in my judgment. However, I don’t recommend selling the conservatively managed, dividend-paying titans of the industry, such as Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM) or Royal Dutch Shell (NYSE: RDSA).

These low-volatility stocks are unlikely to fall far if the price of crude backtracks $10 or even $20. Hold them. My sell advice is directed at the industry’s more speculative players.

Should you be concerned about your master-limited partnerships? Probably not. MLPs are primarily “toll takers,” collecting a fee for transporting, storing or processing fossil fuels. This business is largely insulated from fluctuations in energy prices.

Finally, peculators might consider shorting the United States Oil Trust (NYSE: USO) at $42.80 or higher. USO is an exchange-traded fund (ETF) that tracks the price of oil by investing in futures contracts and other derivatives. However, because of the costs built into the fund’s structure, it has badly lagged its benchmark (West Texas intermediate crude) for more than two years. That’s exactly what you’re looking for in a good short. Set a stop 10% above your entry point.

One last thing: I understand that some retail brokerage firms are reluctant to make USO shares available for short selling. If your broker is in that category, you might consider buying the U.S. Short Oil Fund (NYSE: DNO) at $36 or less.

However, this is really a second-best solution, because trading volume in DNO averages less than 1 million a day. I prefer more liquidity, particularly in a whippy market like oil.

Unmanipulated US "Misery Index" Hits All Time High

While everyone knows that the CPI in the US is manipulated beyond repair (a topic far too broad to be discussed here suffice to say that as disclosed previously true inflation in the US is currently runrating at over 8%), inflation as actually represented by US consumers and reported by Zero Hedge earlier, in the form of the 1 year inflation expectation index of the Conference Board lack of confidence index, is near all time highs. So if one takes this data series and adds to it the narrow unemployment definition (U3) one would get an adjusted Misery Index for US citizens (using inflation expectations instead of manipulated CPI). As the chart below shows, the Misery Index, which is merely inflation plus unemployment, constructed as such, would now be at an all time high. Hardly in keeping with Bernanke's wealth effect prerogative, but surely in line with record food stamp usage reported month after month. That said, the silver lining to that particular mushroom cloud is our confidence that as the bulk of Americans live in record "misery", they will be comforted to know that their 20 shares of NFLX are trading at a four digit EPS multiple. And the other good news is that we have the Brits beat again: whereas the US is at a record, the UK is merely at a 20 year high, proving once again that only the US never does anything half-assed.

Jay Taylor: Turning Hard Times Into Good times

Finding a Safe Haven in a Growing Totalitarian World.



click for audio hour #1 hour #2 hour #3

Comprehensive First Quarter FX Outlook From GTAA

Following the relase of its general equity market overview, GTAA has followed up by releasing the quarterly FX market analysis. In a nutshell, Cleusix sees the USD as the fulcrum security with substantial upside (we would agree...if Bernanke were to not pursue further debt monetization). "The USD is becoming increasingly undervalued against most currencies. It is at a 40 years low on a real broad trade-weighted basis. Sentiment is increasingly supportive for the USD. Speculators had their biggest USD net short position ever a week ago and have covered a third despite continued USD weakness (a positive divergence. Assets in the the Rydex Weakening Dollar have surpassed assets in the Rydex Strengthening Dollar fund but have yet to spike briefly higher as they usually do when the USD decline exhausts itself. There is a big global short USD position which is growing by the day as the increase in foreign central bank reserves can not be completely explained by their current account balance and the net foreign direct investments. Hot money is flowing to emerging markets and we are on the look out for canaries…" All this and much more in the full 56-page report enclosed.

Key Highlights:

The USD is becoming increasingly undervalued against most currencies. It is at a 40 years low on a real broad trade-weighted basis. Its economy is much more dynamic and has started to rebalance earlier than other developed economies. Companies have been cutting costs aggressively and are much more competitive in the international markets.

The big problem remains that the Fed is suppressing real government bond yields through quantitative easing. Ceteris paribus, the USD will have to be more undervalued on a PPP basis to be in equilibrium. Indeed, the deficit of interests payment foreigners are receiving has to be compensated by a lower price I.e. lower USD (this is another reason why emerging markets with negative real yields have very undervalued currencies on a PPP basis). At current levels we think the compensation is large enough.

The declining USD is pushing other Central Banks/Treasuries to become increasingly aggressive buyer of USD to weaken their own currencies. They then have to recycle their newly acquired USD and in so doing are exerting a downward pressure on real rates in the US and thus weakening the USD. This can not last forever. This will end by a radical redesign of our current monetary system and the sooner the better. The winner… Gold.

Sentiment is increasingly supportive for the USD. Speculators had their biggest USD net short position ever a week ago and have covered a third despite continued USD weakness (a positive divergence. Assets in the the Rydex Weakening Dollar have surpassed assets in the Rydex Strengthening Dollar fund but have yet to spike briefly higher as they usually do when the USD decline exhausts itself.

There is a big global short USD position which is growing by the day as the increase in foreign central bank reserves can not be completely explained by their current account balance and the net foreign direct investments. Hot money is flowing to emerging markets and we are on the look out for canaries…

A new “Homeland Investment Act” could be voted in the month to come which could offer some support for the USD as it did at the end of 2004, while oil price rising further might reach a level where its historical highly negative correlation with the USD turns positive as it does when oil price rise enough to break the back of the macro up cycle.

The Euro is 7-10% overvalued, after its recent rebound (more like 20-25% overvalued if you are leaving in Spain and much more if you are Greek). Yields spreads remain favorable and in synch (which is even more important) but the spread momentum has been faltering in the past 2 weeks despite M. Trichet "strong vigilance".

Sentiment is not supportive with Speculators having accumulated a large net long position and a short-term positive risk reversal divergence.
The Euro has been supported by the strong growth in emerging markets and the rapid inflows of hot money. Indeed exports to emerging markets are contributing strongly to the recent performance of the European core area and Emerging Central banks are busy rebalancing their currency holding toward greater diversification (even if they did not they would have to sell some USD to keep the mix stable). We should also remember that a big chunk of emerging markets credit expansion is and has been financed by European banks. So if emerging markets slow down is larger than most expect (our scenario) Europe and the Euro are likely to suffer much more than the US and its currency.

The trend is up but extended. We would exit long positions at least until we get an upside break. We would sell 1.5-3% OTM calls with 1-3 months maturity and would start to build an outright short position on a move below 1.39 and increase it if it moves below 1.375. We would use an initial stop at the high the Euro will make before it move below our trigger zone (so not 1.4248 but higher or lower depending where the current intraday rebounds stop).

Longer-term we maintain that the Euro could fall below 1. We think that it will bottom near 0.7 if it survives. Crazy? We met the same skepticism when we forecasted a rise above 1.5 when the ECB started to intervene when it was hovering near 0.85 almost 10 years ago. While supportive political decisions might be taken in the near future (but it seems they won't as is usual) , the problems won't disappear and will come back later to hunt them. The system, both political and financial has to be reformed but we will probably need a new crisis.
The Yen overvalued by at least 25%. And the authorities have now started to intervene again (this time jointly) putting an implicit floor below 80. The potential sterilization of the BOJ Yen selling and increase in the size of its balance sheet relative to other countries should push the Yen lower. With regard to repatriation, it is a myth. There are no data confirming it after the Kobe earthquake. Yields spreads are diverging negatively with price. This should ultimately leads to a lower Yen.

There is a big non-commercial net long position which is diverging with price (net long position not increasing on Yen strength). “Housewives” have a huge net short position against the USD, the AUD and most other currencies. Position that large have historically led to Yen weakness in the short-term.

There are/have been continued big inflows of hot money in the past 8 of months with the Yen rising despite the broad balance of payment registering a deficit of more than 5% of GDP.

We would need a break above 84.5 for a clear change in the cyclical trend. Until then, our strategy is to sell downside volatility (USD/JPY puts with strike from 80.5 and below and 1 to 3 months to expiry). We would get outright long (the USD/JPY) on a move above 84.5 with a stop at the rising 65 days exponential moving average or on a new move below 80.5. Our first target would be a move to 93.5-94 and then 100. We would totally hedge the Japanese equity holding of “gaijin” investors.

The British Pound is now slightly overvalued and deserve to trade at a bigger discount with lower real short-term yields than in the US. Many accidents are just waiting to happen with notably the residential real estate market. Authorities will use, among others, a depreciation of the Pound to support the British economy. Yields spreads are not confirming the recent Pound appreciation.

Speculators are net long but they have sold some on strength which is a bearish divergence. The risk reversal is still in synch with the cross.

The British Pound is in the middle of its up channel entering an important resistance zone. We might contemplate taking a short position on a move below 1.60. We are seller of upside volatility on a move above 1.65. We would sell 1.675-1.69 1-3 months to expiry calls.

The CHF is more than 50% overvalued. The SNB has its hands partly tied having been to early to the party. It has already intervened massively and is running out of options (we would not be surprised to see capital controls be introduced on further strength. They could take the form of a tax on foreign money entering the country or negative yields on CHF denominated deposit owned by foreign entity). Walls of money are still heading to Switzerland from European banks while many holders CHF-denominated mortgage in Eastern Europe are slowly but surely getting squeezed. As for the JPY the yields spreads have not confirmed the recent CHF strength.

Speculators have a huge net CHF long position.

The pair is very extended below its 200 and 50 days exponential moving average. This configuration has historically led to a “return to the mean”. The technical structure remains favorable to the CHF with no identifiable trend change. While we do not usually fight trends, we would take a short position at the current 0.8980-0.9015 level. If we can move above 0.935 and then 0.975, the move could extend to last years high.

Commodities currencies are overvalued… The AUD is probably more than 35% above fair value while the NZD is 15-20% overvalued. The CAD is more than 10% overvalued. They have profited from the "Chinese inventory build-up“, Emerging Markets boom, institutional love affair and more recently QE2 related commodity rally. We think that the latter rally is very long on its tooth so…

Speculators have a large AUD long position while there is a negative divergence building in the risk reversal.

The AUD might be in the process of forming a complex top. It looks distributive to us. Remember that when the AUD corrects, it tends to do have a waterfall shape. We can not recommend a long position at this juncture anymore. The level of overvaluation and the fragility of the foundation of its strength makes it to risky. We are seller of upside volatility on a move above 1.02 and would even take a tiny outright short position to profit from the probable RBA selling. We would have to wait for some technical deterioration before we are willing to fight against the carry with more commitment but a close below the recent 0.985 lows would be a move in the right direction.

On emerging currencies, we prefer to stay on the sidelines for now as valuation are not attractive and authorities seems to have decided, especially in Latin America, that their currency will not be allowed to strengthen. If we had to we would maintain a long position on the Taiwan Dollar and the Singapore Dollar. The more then Yen decline the less attractive the Won proposition will become so we are no longer recommending the South Korean currency for those who have to be long…We would not short, however, as the carry is too high for most of them. There will come a time were we will short emerging market currencies opportunistically, as we last did in 2008 but not yet.

Could a Japanese U.S. Debt Selloff Trigger a Dollar Meltdown?

With the disaster in Japan being far from over, the question of how Japan will finance their reconstruction efforts has, for the most part, stayed out of focus. According to reports, the damage is estimated in excess of $300 billion, nearly four times higher than hurricane Katrina. This number will likely rise the longer the nuclear crisis remains unresolved. Karl Denninger of Market Ticker says there are several problems facing the Japanese:

(Video interview of Denninger on Fox Business follows excerpts and commentary)

The Tsunami did a tremendous amount of damage to the landscape and once they get that cleaned up they’re going to have to rebuild. And then you’ve got about 8 gigawatts of electrical generation that’s been taken offline and there’s no hope of restoring that anytime in the near future.

So, the capital flows that have gone into Japan from exports are going to turn into capital flows going the other direction because Japan has to buy the materials that it needs in order to rebuild its society.

The main issue in terms of rebuilding is one of funding. While the US may send foreign aid to help get Japan back on its feet, such measures are not very popular due to our already troubled debt levels and spending problems, so any support we provide will be limited. Japan can’t depend on international aid of any significance either, because, well, no one else gives like the US. Private donations may help people on the ground with food, clothing and shelter, but those are a drop in the bucket compared to what is necessary.

Considering that Japan is the third largest economy in the world, they will be left to come up with the money themselves.

Karl Denninger says that how Japan will come up with the money is “an open question.”

How they’re going to manage to do that without either printing more money, which at some point will cause problems over there, or selling some of their Treasuries is an open question.

Japan owns about 20% of all US debt. It’s safe to say that Japan’s regular purchases of US Treasuries are about to come to a screeching halt, or at least, be reduced significantly. This fact alone means someone is going to need to step in to buy up that excess debt. We can all guess, fairly accurately, who will end up with those new issues.

But even if the Federal Reserve were to buy up the new debt that Japan won’t, there is the question of how Japan is going to fund the $300 billion plus in recovery efforts. And given that there is no end in sight, we may be talking about double that amount – no one really knows.

So, the question is, will Japan need to sell off some of its US debt in order to pay for recovery and reconstruction efforts? And if so, could that be the black swan that could trigger the domino effect that will lead to a US debt sell off, and ultimately, a currency collapse? Until a month ago this was nowhere on the radar. Now, we have every reason to be concerned about this possible black swan event. Karl Denninger weighs in:

The obvious thing to do is to sell some of those holdings. The danger for the United States is not tomorrow, it’s a few months out. Right now, they’re still trying to clean up the mess. But once they actually start actively rebuilding they’re going to have to have a way to finance this.

And that’s where the danger comes from, because if Japan was to start unloading Treasuries, it would be reasonable to assume that the Chinese, who hold an even larger amount, would look at that activity and say ‘well, if we don’t sell now we lose even more. Maybe we want to be selling some ourselves.’ And, that puts quite an interesting squeeze into our budget picture for the United States.

In January, Treasury Secretary Tim Geithner confirmed that we are literally on the brink of a catastrophic debt collapse resulting from a need for money and raising of our debt ceiling. So, it is clear that we’re already in serious trouble as it is. If Japan were to stop buying our treasuries and actually start selling their existing US debt holdings, it could potentially accelerate the already destructive path on which we find ourselves.

As we’ve suggested previously, all it will take is for buyers and holders of US debt to say ‘no more’ and the jig is up. Mainly, we’re talking about China, and if they pull the plug on all of the credit they have thus far extended, then we could literally be talking ‘lights out’.

This may be a low probability event, but so was an earthquake driven Tsunami wiping out the generators that powered the fuel rod cooling stations in Fukuskima. Click below for video.

http://www.shtfplan.com/karl-denninger/could-a-japanese-u-s-debt-selloff-trigger-a-dollar-meltdown_03292011

Warning Signals for Gold Investors

Precious metals market, gold in particular, has been highly influenced by economic indicators and currency market, historically. In our previous essay entitled No Breakout in Gold So Far, Strong Resistance Seen in Silver, we have analyzed the situation in metals, however since no market moves on its own, this essay will provide complementary information regarding other markets.

Relating general stock market and currency fluctuations with metal prices is a widely accepted gauge to measure the strength in precious metal market moves. To connect the relationship between economic scenario and metals fluctuations, let’s take an example.

We had been asked recently by one of our Subscribers "it would appear considerable rebuilding will be necessary in Japan. Any indications this will impact stocks of companies that export timber products?"

We agree that the rebuilding process in Japan will put positive pressure on commodities' prices, also on timber, if... there is money for that. And we know that there will be money for that based on the recent G-7 decision, so not only is this decision inflationary (in the end even if the powers that be decide not to simply print money at this time, they will most likely be forced to do so later on as they will not have enough cash left for other – domestic expenses), but particularly positive for commodities.

Now let's move to another question about the Japan: "has it not struck you that selling US treasuries will increase the price of Yen relative to US dollars which the Japanese Govt. does not want to see happen. More than likely the Japanese will print money over the rest of this decade to pay for most of the reconstruction caused by the Earthquake and Tsunami. Could be wrong but it makes more sense to me notwithstanding it is bad policy."

Actually that makes sense to us and could very well happen. The Japanese are very well acquainted with quantitative easing. They just about invented the concept. Japan was the first economy in recent times to have tried a full-scale version of quantitative easing for a significant period, well before Ben Bernanke. The Bank of Japan lowered the policy rate to zero in February 2001 and then went to quantitative easing the next month. It ended both quantitative easing and its zero interest rate policy only in 2006. Whether you call it “quantitative easing” or量的金融緩和, ryōteki kin'yū kanwa, we tend to think that it makes for bad policy in the end but is good for commodities.

To have a broader overview on precious metals and currencies/economic indicators, let’s see how stock market and currencies are performing at this moment. To do that, let’s turn to the technical portion with analysis of the USD Index. We will start with the long-term chart for the USD Index (charts courtesy by stockcharts.com.)

On the long-term chart we can see a recent breakdown below the rising support line which is clearly in play. Its support has been invalidated and this level has now in fact become a resistance line. In short-term USD Index chart, the index levels have temporarily moved below the support line created by the November 2010 low.

Zooming in, we may see a positive sentiment, possibly a rally to the 78 level or so based on the rising resistance lines from the previous long-term chart, and the Fibonacci retracement levels on the short-term one. It is not clear at this time when this can be expected.

Moreover, the RSI level, which is near 30, is in the range of past local bottoms. Although the breakdown below previous important index lows has not been confirmed, we will find further confirmation based on the Euro Index performance.

The Euro Index has rallied to the declining resistance line formed by the 2008 and 2009 tops. The question now is “Will a breakout be seen?” Furthermore, “Will the index level move above this resistance line and then manages to stay there?” The answers to these questions will likely determine the direction of the next trend in both the USD and Euro Indices.

Overall, no breakout has been seen yet in Euro Index and the trend seems to remain down. With the situation in Portugal, the European debt crisis is still a factor that could stop the current rally in the European currency.

So, what does the above mean for Gold and Silver Investors? It suggests caution for bulls as the rally in the USD Index might ignite a decline in the metals. Please take a look below for details.

Gold and silver are currently negatively correlated to a great extent with the US dollar as far as short term is concerned. Please note the values of the correlation coefficient for gold/USD (-0.83) and silver/USD (-0.88).

As we discussed earlier, the breakdown below the rising support line has not been confirmed in the USD Index. No breakout has been seen in the Euro Index. All this points to a slightly bullish situation for the dollar, which does not signal strong support for precious metals overall at this moment.

Before summarizing we would like to let you know about the recent development in the GDX:SPY ratio.

The GDX:SPY ratio measures mining stocks’ performance against the general stock market. The important news is that we have just seen a spike high in volume.

The sell signal is generally given when we see a single spike high in the volume levels, meaning that the volume in gold and silver mining stocks has been much bigger than that seen in the general stock market. The quality of this signal is enhanced if the ratio encounters a resistance level as well. Such is the case here, as the 200-day moving average and the early March highs are both in play.

While this is not an overly important resistance level, it has stopped rallies in the past. With the recent spike high volume and these resistance levels in play, the outlook is not much promising in the near-term.

This is a big deal because this ratio has been quite reliable in the past in terms of giving a buy/sell signal for gold and silver mining stocks. Based on its previous performance we believe that it should not be ignored.

Summing up, the euro has reached a long-term resistance line and this suggests a likely rally in the USD Index. Based on the recent correlation between USD and precious metals, the above should make Precious Metals Bulls particularly cautious, especially that we have also seen a negative signals from the GDX:SPY ratio.

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Thank you for reading. Have a great weekend and profitable week!

P. Radomski