ColinTwiggs, Author at the patient investor

August 6, 2015

Dollar strengthens on low inflation

Core CPI continues to hover below the Fed’s 2.0% target, while plunging oil prices keep the broad index close to zero. Core CPI is likely to weaken as the beneficial effect of lower energy costs flows through to all sectors of the economy.

CPI and Core CPI

We often read of the threat of impending deflation — which may well occur. But one needs to differentiate between deflation caused by a surge in aggregate supply, as in the present situation, and a fall in aggregate demand as in 2008. The former may well act as a stimulus to the global economy, while the latter threatens a negative feedback loop between income and consumption which can lead to substantial falls in output.

Low inflation takes pressure off the Fed to raise interest rates but we can expect the first increment later this year. 10-Year Treasury yields respected the rising trendline and support at 2.10%, suggesting another test of 2.50%.

10-Year Treasury Yields

The higher trough on the Dollar Index indicates buying pressure and breakout above 98 would signal another test of 100. In the longer term, breakout above 100 would signal resumption of the primary up-trend but is likely to meet push-back from the Fed as a higher dollar would hurt both exporters and domestic producers competing against imports.

Dollar Index

August 6, 2015

Gold-Oil ratio warns of further selling

The Gold-Oil ratio, comparing the price of bullion ($/ounce) to Brent crude ($/barrel), has long been used as an indication of whether gold is in a bull or bear market. When the oil price is high, demand for gold, anticipating rising inflation, is normally strong. The current plunge in oil prices indicates the opposite: weak inflation and low demand for gold. Bullion prices are falling but not fast enough to keep pace with crude, driving the Gold-Oil ratio to an overbought position above 20. Expect a long-term bear market for gold.

Gold-Oil ratio

Spot Gold is consolidating in a narrow rectangle below $1100/ounce. This is a bearish sign, with buyers unable to break the first level of resistance. Breach of support at $1080 is likely and would signal a decline to $1000/ounce*. Declining 13-week Twiggs Momentum below zero confirms a strong primary down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The Gold Bugs Index, representing un-hedged gold stocks, has fallen close to 30 percent since breaking support five weeks ago.

Gold Bugs Index

Barrick Gold, one of the largest global gold producers, is falling even faster.

Barrick Gold

If long-term crude prices continue to fall, like the June 2017 (CLM2017) futures depicted below, gold is likely to follow and support at $1000/ounce will not hold.

WTI Light Crude June 2017 Futures

August 3, 2015

Former Trader Tom Hayes Sentenced to 14 Years for Libor Rigging – WSJ

From David Enrich at the Wall St Journal:

LONDON—Former bank trader Tom Hayes was sentenced to 14 years in prison on Monday after a London jury convicted him of trying to fraudulently rig the London interbank offered rate, or Libor.

The unanimous jury verdict, followed about an hour later by the judge’s 14-year prison sentence, delivers one of the harshest penalties meted out against a banker since the financial crisis.

This sentence will hopefully establish precedent for other regulators to follow. If management condoned the actions, they are as guilty as the trader who perpetrated the crime. Let’s see what actions are taken against them.

August 2, 2015

Crude downward slide continues

Long-term June 2017 Nymex Light Crude futures (CLM2017) is approaching its medium-term target of $54/barrel*, maintaining a premium of about $10/barrel over current delivery. Expect support at $54, but the long-term target could be as low as $36**.

Nymex WTI Light Crude June 2017 Futures

* Target calculation: 60 – ( 66 – 60 ) = 54

** Target calculation: 66 – ( 90 – 60 ) = 36

July 30, 2015April 18, 2024

Fedex bounces back

Next Portfolio Update

The next update for S&P 500 and ASX200 Prime Momentum strategies will be on the weekend, so that investors can place trades on Monday, 3rd August 2015, the first trading day of the month.

North America

Bellwether transport stock Fedex respected primary support at $164, rallying strongly to form a bullish engulfing candle on the weekly chart. Recovery of 13-week Twiggs Money Flow above zero would confirm the bull signal, suggesting a target of $184. Breach of $164 is now unlikely, but a primary down-trend would warn that broad economic activity is contracting.

Fedex

The reporting season got off to a shaky start with Apple and Microsoft disappointing but the ship has steadied. Of the 187 stocks in the S&P 500 that have reported so far, 138 (74%) beat, 14 met and 35 (19%) missed their estimates.

The S&P 500 found support above 2050, the higher trough on 21-day Twiggs Money Flow indicating increased interest from buyers. Breakout above 2130 would signal an advance to 2200*, but further consolidation below the resistance level is likely. Reversal below support at 2040/2050 is unlikely.

S&P 500 Index

* Target calculation: 2130 + ( 2130 – 2050 ) = 2210

The CBOE Volatility Index (VIX) indicates low volatility typical of a bull market.

S&P 500 VIX

Canada’s TSX 60 rallied off the lower trend channel but is likely to encounter resistance at the upper trend channel and 855. Declining 13-week Twiggs Momentum below zero warns of a primary down-trend. Breach of support at 800 would confirm.

TSX 60 Index

Europe

Germany’s DAX is testing support at 11000. A fall-off in export sales to China may be weighing on the market. The decline in 13-week Twiggs Money Flow has leveled off and a trough above zero would signal long-term buyers are driving the market. Recovery above the (second) descending trendline would suggest another advance; confirmed if resistance at 12400 is broken. Reversal below 10700 is unlikely.

DAX

* Target calculation: 12500 + ( 12500 – 11000 ) = 14000

The Footsie found support at 6500. Recovery above 6800 would complete a double bottom reversal, indicating a test of 7100. Completion of a 13-week Twiggs Money Flow trough above zero would also flag buying pressure.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6500 ) = 7500

Asia

The Shanghai Composite experienced strong buying at Wednesday’s close. Support resumed at 3800 on Thursday but efforts to restore stability are likely to undermine credibility of stock prices. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Nikkei 225 is testing support at 20000. Respect would indicate another test of 21000. Breakout above 21000 would offer a target of 23000*. Decline of 13-week Twiggs Money Flow has leveled off, but failure of support at 20000 would signal further selling pressure and another test of 19000.

Nikkei 225 Index

* Target calculation: 21000 + ( 21000 – 19000 ) = 23000

India’s Sensex retreated below 28000, suggesting another test of primary support. Respect of the rising trendline and support at 27000 would indicate the primary up-trend is intact, while breach of 26500 would signal a reversal. A 13-week Twiggs Money Flow trough at zero would confirm buying pressure, while decline below zero would warn of a primary down-trend.

SENSEX

Australia

The ASX 200 is testing resistance at 5650/5700. Breakout would indicate another test of 6000. 13-Week Twiggs Money Flow leveled off, suggesting that selling pressure has eased and the primary up-trend is intact. Reversal below 5400 is unlikely, but would warn of a test of primary support at 5150/5200.

ASX 200

It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.

~ George Soros

July 28, 2015

China: Deja vu all over again

The Shanghai Composite today found support at 3500 today after plunging more than 8% on Monday. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Lost Decade

From Wikipedia:

The Japanese asset price bubble….. was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices had been closely associated with excessive monetary easing policy at the time.

By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ)…..the economy’s decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade.

“…uncontrolled money supply and credit expansion….overheated stock market and real estate bubble.” Sound familiar? It should. We are witnessing a re-run but this time in China. Wait, there’s more…..

…..At the end of August 1987, the BOJ signaled the possibility of tightening the monetary policy, but decided to delay the decision in view of economic uncertainty related to Black Monday (October 19, 1987) in the US.

…..BOJ reluctance to tighten the monetary policy was in spite of the fact that the economy went into expansion in the second half of 1987. The Japanese economy had just recovered from the “endaka recession” ….. closely linked to the Plaza Accord of September 1985, which led to the strong appreciation of the Japanese yen.

…..in order to overcome the “endaka” recession and stimulate the local economy, an aggressive fiscal policy was adopted, mainly through expansion of public investment. Simultaneously, the BOJ declared that curbing the yen’s appreciation was a “national priority”……

Global stock market crash leads to prolonged monetary easing…… aggressive expansion of public investment to stimulate the domestic economy…..central bank efforts to curb appreciation of the currency. We all know how this ends. We’ve seen the movie before.

It’s like deja-vu, all over again. ~ Yogi Berra

July 27, 2015

George Soros: Assume that markets are always wrong…

The prevailing wisdom is that markets are always right. I take the opposition position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis. It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend. This line of reasoning leads me to look for the flaw in every investment thesis…. I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.

~ George Soros

July 25, 2015

Does a Dead Kazakh KGB Chief Own Sherlock’s House? – The Daily Beast

From Michael Weiss:

…..“These wealthy oligarchs all come to London because it’s a really good place to put your money,” Simon Farrell QC, a British attorney who specializes in corporate crime and money laundering, told The Daily Beast. “It’s a fantastic place to hold property because it’s a secure democracy where the rule of law is taken seriously, where the judiciary is not corrupt and where you can trust the legal profession. In many parts of the world the super-rich can’t be sure that their assets will be safe.”

Indeed, London has now earned the unflattering designation of the world’s No. 1 money-laundering capital, with an estimated $1 billion pouring in each month…..A stunning £122 billion in real estate in England and Wales is held be companies registered outside England and Wales, according to Global Witness….

July 24, 2015

Chinese Manufacturing Activity Falls in July – The New York Times

From Reuters:

BEIJING — China’s factory sector contracted by the most in 15 months in July as shrinking orders depressed output, a preliminary private survey showed on Friday, a worse-than-expected result that should reinforce bets the struggling Chinese economy will get more stimulus.

The flash Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) dropped to 48.2, the lowest reading since April last year and a fifth straight month below 50, the level which separates contraction from expansion.

July 24, 2015

Transports deflate

Bellwether transport stock Fedex is testing primary support at $164 on the weekly chart. Bearish divergence on 13-week Twiggs Money Flow warns of a reversal. Breach of $164 would signal a primary down-trend — a warning that economic activity is contracting.

Nasdaq 100

The LoDI National Index from University of Louisville and Oklahoma State University also declined for the last two months but remains above 50, indicating a healthy level of economic activity.

LoDI National Index

The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.

Breach of primary support by Fedex and reversal of the LoDI below 50 would warn of a contraction in economic activity but we are not there yet.

North America

The reporting season got off to a shaky start with Apple disappointing but the ship seems to have steadied. Of the 62 stocks in the S&P 500 that have reported, 43 beat, 5 met and 14 (or 22%) missed their estimates.

The S&P 500 met resistance at 2130 and 21-day Twiggs Money Flow peaks close to zero warn of medium-term selling pressure. Another test of support at 2040/2050 is likely. Recovery above 2130 is unlikely at present, but would offer a target of 2200*.

S&P 500 Index

* Target calculation: 2130 + ( 2130 – 2050 ) = 2210

The CBOE Volatility Index (VIX) remains at low levels typical of a bull market.

S&P 500 VIX

Canada’s TSX 60 respected the upper trend channel, warning of continuation of the correction. Declining 13-week Twiggs Momentum below zero warns of a primary down-trend. Breach of support at 800 would confirm.

TSX 60 Index

* Target calculation: 900 + ( 900 – 850 ) = 950

Australia

The ASX 200 respected resistance at 5650/5700, warning of another test of support at 5400. Breach would test primary support at 5150/5200, while respect would indicate that the correction is over; follow-through above 5700 would confirm. 13-Week Twiggs Money Flow oscillating above zero indicates long-term buying pressure, suggesting that the primary up-trend is intact.

ASX 200

If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.

~ George Soros