Author: ColinTwiggs

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S&P 500 still flaky

From Howard Silverblatt at S&P Indices:

“With almost 90% of the Q4 2015 earnings reported, 67.6% of the issues are beating estimates (the historical rate is two-thirds), but only 36.8% beat As Reported GAAP rule based earnings estimates and less than half, 46.8%, beat sales estimates.

Explained ‘responsibility’ for any short fall on the cost side includes currency costs and a growing list of special one-time items (never to be repeated, of course). On the income side, helping earnings, are the ‘difficult decisions made’ by companies under the heading of cost-cutting (as layoffs and location changes appear to be on the rise).”

As Reported 12-Month Earnings Per Share (EPS) for the S&P 500 has fallen 12.5% from its Q3 2014 high, with 88.5% of companies having reported.

S&P 500 EPS

While same-quarter sales will fall an estimated 2.6% in December 2015.

S&P 500 Quarterly Sales

Manufacturing activity is declining, with the PMI Composite index below 50 signaling contraction.

PMI Composite index

Growth in the Freight Transportation Services Index has also slowed.

Freight Transportation Services Index

But electricity production recovered from its alarming downward spike in December last year.

Freight Transport Index

The jobs market remains bouyant, with annual manufacturing earnings growth rising 2.5%.

Annual Change in Hourly Earnings

Inflation has kicked upwards as a result.

CPI and Core CPI

While profit margins are likely to remain under pressure.

Nonfinancial Profit Margins

Light vehicle and retail sales are holding their own.

Light Vehicle Sales

Retail Sales (ex-Gas and Automobiles)

And bank lending continues to post steady growth.

Bank Loans and Leases

But net interest margins have fallen below their 2007 lows.

Bank Interest Margins

With rising spreads warning of a credit squeeze.

10-year Baa minus Treasury Spreads

Conclusion

Sales levels are reasonably healthy, but rising wages and competition from imports is putting pressure on profits. Rising credit spreads and falling margins suggest all is not well in the banking sector, which could impact on broader economic activity.

Housing starts remain slow.

Housing Activity

Only when this sector (housing) eventually revives can we expect to see a full recovery.

Cement and Concrete Production

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A New Cold War? Russia’s Confrontation with the West

Michael A. McFaul, Stanford University professor of political science; director and senior fellow, Freeman Spogli Institute for International Studies; Peter and Helen Bing Senior Fellow, Hoover Institution; Stanford University, former ambassador to Russia (2012 – 2014).

Colin’s Comment:
Here is what I see as the big picture:

  • The current confrontation is more about the actors than about long-term strategy or geopolitical conflict
  • Russia is part of Europe, culturally and economically, and its destiny lies in the West
  • A strong Russia is in the West’s interest — a weak Russia invites encroachment from China in the East
  • The West has to build a strong deterrent to aggression from the current regime
  • While leaving the door open to long-term participation in European democratic structures, scientific cooperation and trade.
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Is it time to get long the Australian dollar? – MacroBusiness

From David Llewellyn-Smith at Macrobusiness:

….Even if the US dollar does fall for a period and adds a monetary tailwind to commodity prices and currencies, it is still pushing against the fundamental commodity price weakness driven by falling Chinese demand growth and excess supply. The latter should still win in the end and the Aussie continue to fall, even if more slowly than it might have otherwise.

Given MB still sees this oversupply as the cracked key-stone in the global business cycle arch, and expects that it is large and pervasive enough that rationalisation can only come through a global scale bankruptcy for producers sovereign and private, as well as the outlook that that poses for local growth and interest rates, our forecasts of 60 cents this year and 45 cents as the cycle low remain unchanged.

Can’t see the Aussie falling as low as 45 cents but I agree with the 2008 low of 60 cents as a 2016 target.

Source: Is it time to get long the Australian dollar? – MacroBusiness

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One swallow does not a summer make

“One swallow does not a summer make, nor one fine day; similarly one day or brief time of happiness does not make a person entirely happy.”

~ Aristotle (384 BC – 322 BC)

Similarly, one brief rally does not make a bull market.

Dow Jones Global Index found support at 270 and is rallying to test resistance at the former primary support level of 290. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend. Breach of 270 would confirm another decline. Recovery above 290, on the other hand, would indicate a more gradual down-trend rather than a reversal; respect of the descending trendline at 300 would confirm.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Dow Jones Industrial Average recovered above primary support at 16000, long tails on weekly candles reflected committed buying. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 16500 would signal a test of 17000. But respect of 17000 is likely and would warn of continuation of the primary down-trend. Breach of 16000 would confirm the signal, offering a target of 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The S&P 500 is similarly headed for a test of 1950. Rising 13-week Twiggs Money Flow again reflects medium-term buying pressure. Reversal of the primary trend is unlikely and breach of support at 1850 would confirm a decline to 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) is headed for another test of support at 20. Respect is likely and would confirm that risk remains elevated.

S&P 500 VIX

Canada’s TSX 60 broke resistance at 750. Rising 13-week Twiggs Momentum suggests that a bottom may be forming, but only another test of 700 would confirm this.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

Transport

Bellwether transport stock Fedex (FDX) found support at $120. Recovery above $140 would signal a test of $150 and the descending trendline. But the primary down-trend remains intact.

Fedex

Europe

Germany’s DAX is testing resistance at 9500. The rally may well follow-through to 10000 but buying pressure on 13-week Twiggs Momentum appears secondary and the primary down-trend is intact.

DAX

* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

Deutsche Post AG (DPW.DE), Europe’s bellwether equivalent of Fedex, found support at € 20. A rally that respects resistance at € 23 would confirm a strong primary down-trend, while respect of € 25 and the descending trendline would indicate a more gradual decline. 13-Week Twiggs Money Flow declining below zero signals long-term selling pressure.

Deutsche Post AG

The Footsie recovered to 6000, but expect strong resistance at this level (and the declining trendline). 13-Week Twiggs Momentum oscillating below zero flags a primary down-trend. Long-term target for a decline remains 5000*.

FTSE 100

* Target calculation: 6000 – ( 7000 – 6000 ) = 5000

Asia

The Shanghai Composite Index found support at 2700. Expect a test of resistance at 3000, but the primary trend is clearly down and likely to remain so for some time.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is retracing to test the new resistance level after breaking primary support at 17000. Respect is likely and would confirm the primary down-trend. Decline of 13-week Twiggs Money Flow below zero strengthens the bear signal.

Nikkei 225 Index

* Target calculation: 17 – ( 20 – 17 ) = 14

India’s Sensex broke the bottom border of its trend channel, testing support at 23000. The primary down-trend is accelerating. Respect of resistance at 24000 is likely and would warn of a test of 22000. Respect of resistance at 25000, on the other hand, would suggest a more gradual descent.

SENSEX

* Target calculation: 25000 – ( 27500 – 25000 ) = 22500

Australia

The ASX 200 retraced to test resistance at 5000 and the descending trendline. Respect of the latter is likely and would confirm the primary down-trend. Bullish divergence on 13-week Twiggs Money Flow indicates medium-term (secondary) buying pressure. The weight of the market remains on the sell (bear) side. Respect would indicate a test of support at 4600, but the long-term target remains 4000*.

ASX 200

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

Banks are taking a hammering, with the Finance sector ($XFJ) in a clear down-trend. Retracement to test resistance at 5700 is secondary. A rally that respects the descending trendline would suggest a decline to 5100*. Declining 13-week Twiggs Money Flow reflects long-term selling pressure.

ASX 200 Financials

* Target calculation: 5400 – ( 5700 – 5400 ) = 5100


More….

I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.

~ Paul Tudor Jones

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Gold: PBOC makes its move

China’s PBOC made its move against the hedge funds on Monday, while many hedge fund managers were enjoying a long weekend in the Hamptons. With more than $3 Trillion of foreign reserves, this is a fight that the PBOC is likely to win, provided it stands firm. Hedge funds betting on a collapse of the Yuan can leverage their positions, but that makes them vulnerable to margin calls. Driving the Yuan below 6.50 to the Dollar may force some to cover their shorts, which would further strengthen the beleaguered currency.

USDCNY

China’s sell-off of foreign reserves has caused the Dollar to fall, in the midst of a flight to safety. Retracement that respects resistance at 97.50/98.00 would indicate a decline to test primary support at 93.00. Decline of 13-week Twiggs Momentum below zero warns of a primary down-trend.

Dollar Index

Flight to safety has spiked demand for Gold. Expect retracement to test support between $1150 and $1200/ounce. But respect of either level would confirm a trend reversal (after recovery above $1200 completes a higher trough).

Spot Gold

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China goes all-in on the Yuan

China is betting that it can use its more than $3 Trillion of foreign reserves to stare down hedge funds betting on a collapse of the Yuan. Any sign of weakness in the Yuan would fuel further speculation and flight to safety. The caterpillar on the right of the daily chart reflects PBOC efforts to support the Yuan (prevent further appreciation of USDCNY).

USDCNY

But you need plenty of bikkies (chips) to stand firm against the market and China is depleting its foreign reserves to buy up Yuan. IMF figures to September last year show a substantial fall in foreign reserves (excluding gold) but the pace has accelerated and I suspect China must now be close to the $3 Trillion mark (from a high of $4.0T in June 2014).

China Foreign Reserves ex-Gold

China’s sell-off of foreign reserves has had an unusual impact: in the midst of a flight to safety, the Dollar is falling. Sell-off by the PBOC is driving the Dollar Index lower. Good news for US exporters (and manufacturers competing against imports) who would have been crucified by a rising Dollar.

Dollar Index

Flight to safety not only led to a sell-off in the Yuan but has spiked demand for Gold. If you can’t get your capital out of China to buy real estate in Vancouver or Sydney then the next best alternative is to buy gold. Spot metal prices brushed aside expected long-term resistance at $1200/ounce, reaching highs of $1250. Expect some retracement, but gold should find support at $1200. Completion of a higher trough would confirm a primary trend reversal.

Spot Gold

Global stocks

Dow Jones Global Index respected resistance at the former primary support level of 290. Breach of 270 would confirm another decline. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Dow Jones Industrial Average is hammering primary support at 16000 but long tails on weekly candles (and rising 13-week Twiggs Money Flow) highlight committed buying. Expect another bear rally next week, but the weight of the market is on the sell side and is unlikely to change course. Breach of 16000 offers a target of 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The S&P 500 also rallied Friday and recovery above 1850 suggests another test of 1900/1950. Rising 21-day Twiggs Money Flow reflects medium-term buying pressure. Reversal of the primary trend is unlikely and breach of support at 1850 would confirm a decline to 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) continues to range between 20 and 30, reflecting elevated risk.

S&P 500 VIX

U.S. equity and options markets will be closed on Monday, February 15, 2016, in observance of Presidents’ Day.

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Canada’s TSX 60 also retraced to test resistance at 750. Respect is likely and breach of 700 would offer a target of 650*. Declining 13-week Twiggs Momentum peaks below zero indicate a strong primary down-trend.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

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Europe

Dow Jones Europe index continues its primary down-trend. Breach of support at 260 would signal another decline. Declining 13-week Twiggs Momentum below zero confirms a strong down-trend.

Dow Jones Europe

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Germany’s DAX is testing primary support at 9500. Peaks below zero on 13-week Twiggs Momentum warn of a primary down-trend. Follow-through below 9300 would confirm.

DAX

* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

The Footsie retreated below 6000, signaling a primary down-trend. 13-Week Twiggs Momentum peaks below zero further strengthen the signal. Long-term target for a decline is 5000*.

FTSE 100

* Target calculation: 6000 – ( 7000 – 6000 ) = 5000

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Asia

Dow Jones Asia breached support at 2400 confirming another decline. Declining 13-week Twiggs Momentum below zero confirms a strong down-trend.

Dow Jones Asia

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Support has given way on the Shanghai Composite Index, strengthening the primary down-trend signaled last August when 13-week Twiggs Momentum crossed below zero. Target for the decline is 2400*.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is testing primary support at 17000. Breach is likely and would confirm the primary down-trend signaled by 13-week Twiggs Momentum below zero.

Nikkei 225 Index

* Target calculation: 94 – ( 106 – 94 ) = 82

Two failed swings on India’s Sensex (failing to reach the upper trend channel) warn of increasing selling pressure. Declining 13-week Twiggs Momentum peaks below zero confirm this. Follow-through below 24000 would offer a target of 22500*.

SENSEX

* Target calculation: 25000 – ( 27500 – 25000 ) = 22500

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Australia

The ASX 200 broke support at 4900 this week, confirming a (primary) decline. There are still buyers hoping for a reversal — illustrated by bullish divergence on 21-day Twiggs Money Flow (indicates medium-term buying pressure) — but the weight of the bear market is against them. Expect a test of support at 4600 in the next few weeks but the long-term target is 4000*.

ASX 200

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

Banks are taking a hammering, breach of 75.00/76.00 signaling a decline to 66.00*. Now is not the time to go bargain-hunting. What looks cheap today may be even cheaper tomorrow.

ASX 300 Banks

* Target calculation: 7600 – ( 8600 – 7600 ) = 6600

The only sound reason for buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering.

~ Nicholas Darvas

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BHP Billiton

I have seen a few advisers recommending BHP to clients but there are no signs that the commodity free-fall is ending.

Bulk Commodities

Bullish divergence on 13-week Twiggs Money Flow reflects medium-term buying pressure. Expect strong resistance at 16.50. Breach of short-term support at 14.00 remains likely and would signal another decline.

BHP

The weight of the market is on the sell-side and a knife-edge reversal is most unlikely.

BHP

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Janet Yellen on financial market turmoil

Federal Reserve chair Janet Yellen before the House Financial Services Committee:

Janet Yellen

“…..As is always the case, the economic outlook is uncertain. Foreign economic
developments, in particular, pose risks to U.S. economic growth. Most notably,
although recent economic indicators do not suggest a sharp slowdown in
Chinese growth, declines in the foreign exchange value of the renminbi have
intensified uncertainty about China’s exchange rate policy and the prospects for
its economy.

This uncertainty led to increased volatility in global financial markets and, against the
background of persistent weakness abroad, exacerbated concerns about the outlook for
global growth. These growth concerns, along with strong supply conditions and high
inventories, contributed to the recent fall in the prices of oil and other commodities. In
turn, low commodity prices could trigger financial stresses in commodity-exporting
economies, particularly in vulnerable emerging market economies, and for commodity-
producing firms in many countries. Should any of these downside risks materialize,
foreign activity and demand for U.S. exports could weaken and financial market
conditions could tighten further…..”

…No rate rises any time soon.

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