Author: Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients. Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter. Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
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European buying pressure

The FTSE 100 is retracing to test support at 5700. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Respect of 5700 would signal an advance to 6100; expect strong resistance at that level because of the number of previous peaks. Breakout would offer a long-term target of 6750*.

FTSE 100 Index

* Target calculation: 6000 + ( 6000 – 5250 ) = 6750

Madrid General Index is consolidating above 720 after completing a double-bottom reversal. Follow-through above 760 would signal an advance to 900*. Bullish divergence on 13-week Twiggs Money Flow indicates long-term buying pressure. Penetration of the descending trendline would strengthen the reversal signal.

Madrid General Index

* Target calculation: 750 + ( 750 – 600 ) = 900

Germany’s DAX shows strong buying pressure, with 13-week Twiggs Money Flow oscillating high above zero. Consolidation or retracement below 7200 is likely, followed by an advance to 7600. Expect strong resistance at 7500/7600 because of the number of previous peaks.

DAX Index

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Canada: TSX60 buying pressure

The TSX 60 is testing resistance at 700 on the weekly chart. Penetration of the descending trendline suggests that a bottom is forming. Oscillation of 13-week Twiggs Money Flow above zero indicates buying pressure. Follow-through above 700 would test primary resistance at 730. Reversal below 680 is unlikely, but would re-test primary support at 640.

TSX 60 Index

* Target calculation: 730 + ( 730 – 640 ) = 820

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S&P 500 and Nasdaq bearish divergence

The S&P 500 Index continues to test resistance at 1420. Bearish divergence on 21-day Twiggs Money Flow warns of medium-term selling pressure. Expect a test of the lower trend channel; reversal below 1380 would indicate a correction. Breakout above 1420, however, would signal an advance to the 2007 high at 1560*.

S&P 500 Index

* Target calculation: 1420 + ( 1420 – 1280 ) = 1560

The Nasdaq 100 is similarly testing resistance at 2800 on the weekly chart. Breakout would offer a target of 3150*. The 63-day Twiggs Momentum trough above zero indicates continuation of the primary up-trend, but reversal below zero would warn of a primary down-trend.

Nasdaq 100 Index

* Target calculation: 2800 + ( 2800 – 2450 ) = 3150

Fedex is testing support at $88, neckline of the March/April double top. Failure of support would suggest continuation of the primary down-trend; confirmed if support at $84 is broken.

Fedex

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Gold breaks out on dollar weakness

Raised expectations of further quantitative easing by the Fed caused the Dollar to fall sharply. Penetration of the rising trendline by the US Dollar Index would warn that a top is forming. Reversal of 63-day Twiggs Momentum below zero would suggest a primary trend reversal. Respect of support, however, would indicate that the market overreacted and the primary trend will continue.

US Dollar Index

* Target calculation: 82 + ( 82 – 78 ) = 86

Spot Gold broke resistance at $1650 per ounce, indicating  a primary up-trend. Recovery of 63-day Twiggs Momentum above zero strengthens the signal. A trough above zero or retracement that respects the new support level would confirm the breakout, suggesting an advance to $1800.

Spot Gold

The CRB Commodities Index also benefited from the weaker dollar, breaking medium-term resistance at 305 to indicate a test of the February high at 325. Recovery of 63-Day Twiggs Momentum above zero suggests a trend reversal, but only a trough above zero would confirm.

CRB Commodities Index

Brent Crude continues to test resistance at $115 per barrel. Breakout would indicate a test of the March high at $126. Reversal below $108 is unlikely, but would signal another test of support at $90/$100. 63-Day Twiggs Momentum recovery above zero would strengthen the bull signal.

ICE Brent Crude Afternoon Markers

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BOB JANJUAH: Time For Action, Warning Over – Business Insider

Sam Ro of Business Insider reports on Nomura strategist Bob Janjuah’s August 21 note:

“I now think the correct thing to do – as I also said in April and June – is to prepare for a serious risk-off phase between August and November,” [Janjuah] reiterated. “Over the August to November period I am looking for the S&P500 to trade off down from around 1400…by 20% to 25%…to trade at or below the lows of 2011.”

He argues that the key drivers of this sell-off will be disappointment at next week’s Federal Reserve Jackson Hole speech and realization that the ECB won’t be be able to deliver on their promises.

via BOB JANJUAH: Time For Action, Warning Over – Business Insider.

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When will the Fed QE?

Is the Fed likely to introduce new asset purchases before or after the November election? Peter Boockvar at The Big Picture writes:

Bottom line, of the 10 voting FOMC members, 8 are doves so it will always be the case that “many” are ready for more QE if need be. The hawks are few and far between. I stick to my belief that more QE is coming on Sept 13th as the Oct meeting is too close to the election and Bernanke won’t act in Dec if Romney wins. This could be his last chance for a while and Ben still seems to believe in the pixie dust of QE.

CNBC reports Nomura’s Bob Janjuah is predicting more quantitative easing from the Federal Reserve in December.

Those hoping for a big bazooka from the Fed or the European Central Bank before December will be disappointed, [Janjuah] said.

My view is that September is too soon: the Fed is likely to hold off until after the election unless the situation gets desperate. And December is too soon afterwards. Early 2013 seems a safer bet.

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Money Fund Reforms Seen Harming Alternative to Banks

SEC attempts to reform the money market industry are running into opposition from corporate treasurers. Maria Sapan from Securities Technology Monitor writes:

The Securities and Exchange Commission has proposed rules that would revamp the $2.6 trillion U.S. money market fund industry, arguing it remains a risk to the financial system. Last month, [Thomas C. Deas, Jr., the treasurer of chemical company FMC Corp and chairman of the National Association of Corporate Treasurers] testified before a House subcommittee that the reforms – such as floating the funds’ net asset value or imposing new capital requirements – would “have a significant negative impact on the ongoing viability of these funds, and also adversely affect the corporate commercial paper market.”

Money market funds are effectively involved in maturity transformation — borrowing short and lending long — which is a function of banks. Maturity transformation is vulnerable to bank runs in times of uncertainty, where depositors demand repayment and borrowers are unable to comply because of liquidity pressures. My view is that if you want to perform the functions of a bank, you need to be registered as a bank, with the same reserve requirements as other banks, and supervised by the Fed. Avoiding these requirements may provide cheaper sources of credit to large corporates, but at the cost of increased risk to the entire economy.

via Money Fund Reforms Seen Harming Alternative to Banks.

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Fed Minutes Suggest Action Likely – WSJ.com

By JON HILSENRATH And KRISTINA PETERSON

The Federal Reserve sent its strongest signal yet that it is preparing to take new steps to bolster the recovery, saying that measures would be needed fairly soon unless economic growth picks up substantially.

The statement was included in minutes released Wednesday from the Fed’s July 31-Aug. 1 policy meeting. The minutes also indicated that a new round of bond buying, known as quantitative easing, was high on its list of options.

via Fed Minutes Suggest Action Likely – WSJ.com.

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Germany backs Draghi bond plan against Bundesbank – Telegraph

By Ambrose Evans-Pritchard,
9:39PM BST 20 Aug 2012

“A currency can only be stable if its future existence is not in doubt,” said Jörg Asmussen, the powerful German member of the ECB’s executive board. He signalled full backing for the bond rescue plan of ECB chief Mario Draghi, brushing aside warnings from the German Bundesbank that large-scale purchases would amount to debt monetisation and a back-door fiscal rescue of insolvent states in breach of EU treaty law.

via Germany backs Draghi bond plan against Bundesbank – Telegraph.

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Milton Friedman's Advice

In 1997 Milton Friedman commented on Bank of Japan policy following Japan’s deflationary spiral of the early 1990s:

Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.

Austerity measures adopted in Europe are failing and central banks are likely to attempt Friedman’s option in a number of guises. Already, as Gary Shilling points out “competitive quantitative easing by central banks is now the order of the day.” The Bank of Japan last year expanded its balance sheet by 11 percent, the Federal Reserve by 19 percent, the European Central Bank by 36 percent and the Swiss National Bank by 33 percent. Even countries with relatively strong balance sheets, like Switzerland, are forced to respond to prevent appreciation of their currencies from harming exports.

Inflation will remain moderate only so long as central bank balance sheet expansion is offset by deflationary pressures from private sector deleveraging. That is the difficult task ahead: to maneuver a soft landing by balancing the two opposing forces. Failure to do so could lead to a bumpy ride.

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