Friday, 28 November 2014

The big picture with monthly charts



Today was the last trading day of the month. Let's take a look at the where the monthly charts stand to asses the BIG picture. A few interesting developments occurred... 

EQUITIES


The S&P 500 spent over a decade consolidating the massive 1982-2000 bull market, before breaking out from the green line and resuming the bull market. The RSI on the monthly chart is also strong.

Yes, a consolidation here would be healthy but consider that we have 2 bullish cyclical trends in 2015:
  1. Presidential Cycle. The 3rd year is the most bullish of the four, with 16% avg. gain and 88% positive years
  2. Decennial Cycle. Years ending with a "5" (eg. 2015) have historically performed better than the other 9, with a 21% avg. gain and 83% positive years.

Perhaps the biggest potential in equity markets has to be in Japan. The NIKKEI has broken out from 25 year resistance! As we'll show further in this post, the YEN and NIKKEI:SPX ratio charts also confirm the bullish case for NIKKEI. 



TREASURY BONDS

The USB (30-year treasury bond) monthly chart is shown below. Bonds have been in a 30+ year bullish channel. But now there are signs that this channel can roll-over. Notice how the RSI is showing bearish divergence. We are also right at RSI resistance (blue line). 



CURRENCIES

A few months ago, the USD broke out of a 10-year base. It can consolidate here, but the big picture is healthy for the dollar. This is bad news for commodities & foreign currencies.


The US Dollar Index is the weighted sum of foreign currencies:

  • USD:EUR = 57.6% weight
  • USD:JPY = 13.6% weight
  • USD:GBP = 11.9% weight
  • USD:CAD = 9.1% weight
  • USD:SEK = 4.2% weight
  • USD:CHF = 3.6% weight

So if the USD is long-term bullish, are the charts for EUR, YEN, GBP and CAD bearish? You bet.

Below is the EUR monthly. This was the first month that the Euro closed below the neckline of a 10-year topping formation. There can be much more downside from here



Similar to the EUR, this was the first month that the YEN broke the neckline of a 30-year topping formation with bearish RSI divergence. As bad as the decline over the last 2 years has been, there could be a lot more downside left. This is good news for the Nikkei, but bad news for Gold.



Here's the XBP monthly. After hitting major resistance at the blue arrow, XBP has been falling for 5 consecutive months. There is nothing bullish about this chart at all. 


Finally, here is the CAD monthly chart. Again - lots of room to continue falling. 


It should be noted that CAD and AUD are considered to be "commodity currencies" as they are heavily correlated with commodities such as oil and copper. This leads us nicley into the next asset class...


COMMODITIES

If the USD is long-term bullish, are commodities bearish? You bet.

The CCI index equally weighs a basket of 17 commodities in agriculture, base & precious metals and energy. The CCI monthly recently broke the neckline of a 5-year topping formation


Copper is also breaking down from a 5-year topping formation. Notice long-term support is still quite a ways away like the CAD.


Gold broke a 14-year uptrend a few months ago. This month, it is breaking a 5-year topping formation.



At the same time, gold miners (GDX) also closed below an important 20-yr support line. Notice the long-term bearish RSI divergence.


Following the OPEC meeting on Thurs, Oil fell 6% in one day and is down 18% for Nov. The chart below shows the bearish long-term picture.


$GNX is an energy-dominated commodity index. It broke a 15-year uptrend this month.




INTER-MARKET

We've looked at asset classes in isolation above. Now let's look at ratios between asset classes.

The DOW:Bonds ratio is one of my favorite charts. Notice how the ratio spent 15 years digesting the 1982-2000 bull market. The ratio has been forming a tight coil this year and looks ready to make the big breakout to all-time new highs.



The SPX:GOLD ratio has also formed a long, rounded bottom with bullish RSI divergence. The base has broken out in recent months.


The SPX:EEM ratio shows a huge rounded bottom base with bullish RSI divergence. As we've shown before, this ratio has a strong inverse correlation with GDX (Gold Miners ETF).


And here is the SPX:TSX ratio. The TSX is the Canadian market, which is dominated by oil & gas and mining companies. So this ratio is similar to the previous two, and has also completed a nice rounded base and is now in an uptrend.


OK, so we see that US equities will outperform bonds and commodities. Let's tie the SPX in with currencies now.

In the 90's, the USD (shown in red) made a base breakout before starting a nice bull market. Notice that this coincided with the strongest years in recorded history for the SPX (shown in black). The USD is currently making a similar base breakout now.


We've made the case that US equities are the place to be for the longer term. Is there anything better?

Here's the Nikkei:SPX ratio. The Nikkei has lagged the SPX for 22 years, but now looks like it's creating a large base with bullish RSI divergence. 

Recently, this ratio rallied, created a bull flag and now looks ready to rally to the base neckline. Again, the Nikkei and Yen charts above further support the bullish case for the Nikkei. 



CONCLUSION

The monthly charts above show a long-term bullish picture for US & Japanese equities and the US Dollar, but a bearish picture for Treasury Bonds, Foreign Currencies (EUR, YEN, CAD) and Commodities (Gold, Copper, Oil, etc). This analysis is further confirmed with inter-market ratio charts.

The most promising area for a long-term buy might be Japan stocks. The Nikkei broke out of a 25-year downtrend while the yen broke 30-year support recently. Nikkei is also showing nice relative strength against the S&P 500.

The top holdings of the Nikkei are auto and electronics manufacturers. Going forward, these companies will benefit from falling commodity prices (reduced input costs) and a falling yen (higher export revenues). Add to this the record low interest rates (low borrowing costs) and BOJ's amped-up stimulus program (asset buying program increased from 60 trillion yen per year to 80 very recently) and you have all the right ingredients for a rally in Japan stocks.

The best vehicle for getting exposure to Japan would be through DXJ (the currency-hedged large-cap Japan ETF).

Hope you found this analysis useful and please leave me your feedback!

Saturday, 15 November 2014

Market Analysis Nov 15th

It's been a while since I did an update. Let's take a quick look on where various asset classes stand:

US EQUITIES

MDY (Weekly) is the ETF for mid-cap stocks. It's currently facing 5-month resistance after a fierce rally. A short-term pullback looks due. Eventually, I expect MDY will breakout to new highs.



SPY (Weekly) is also at resistance as seen below. A pullback here would be very healthy



BONDS

While US Equities are facing resistance, the 10-year Treasury Bond (UST) is at base support. A rally in bonds here is likely, which would help gold.



CURRENCIES

Euro (Weekly) is very close to a decade-long support line. The smart money is aggressively long the Euro, making it highly probably that we see a rally soon.


USD is very loved by the dumb money after a sharp rally. We can see a $5 (-6%) pullback to retest the 10-year base breakout on the monthly chart below. This would be very healthy, helping to cool off sentiment.



EFA:SPY (Weekly) Ratio has a strong inverse correlation with the USD. It is currently testing all-time lows as support. A bounce here is likely.



GOLD

If US Bonds and Euro are about to rally, we should expect Gold to look bullish as well. The charts for gold and gold miners do give confirmation.

Here are monthly charts for Silver and 3 gold miner indicies: HUI, GDX and XAU. These charts go back to the 80's and show that this space is on MAJOR support.


And here are the weekly charts for Gold, Silver:Gold ratio, GDX and GDXJ. Again, we see major support being held.



COMMODITIES

Below are weekly charts for CDNX (Canadian Venture Exchange), REMX, URA and USO. All these indices are on major support. Given these and charts from other asset classes, expect commodities to rally here.





Thursday, 16 October 2014

Market Analysis Oct 16th



I'm back from my break!

A lot happened in the markets over the past 6 weeks. Let's take a look where all asset classes stand.


EQUITIES:

SPX (Weekly) fell after hitting 5-year channel resistance with bearish RSI divergence


IWM (Small Caps) have been underperforming the SPX (Large caps) by -7% this year, which is a red flag for equities. Here is IWM (Weekly). Small caps broke down from a 1-year topping formation with bearish RSI divergence, similar to the breakdown in 2011. Expect to see further downside from here


TZA is the 3x inverse of IWM. Notice how TZA is retesting a base breakout on its weekly chart with bullish RSI divergence.


VIX (Weekly) is also signalling a warning after breaking out of a large wedge and hitting its highest level since 2011. 


Similar to Oct 2007, Utilities have been outperforming this year while Financials and Homebuilders have been lagging. Source: Charlie Bilello, Pension Partners


All this is happening while investors are extremely optimistic on equities, similar to '07 and '11.



BONDS:

High-yield corporate bonds are correlated with US equities and are giving the same bearish message. Here is the JNK:USB (Junk:Treasury) bond ratio breaking down from a topping formation.



And here is HYG (High-yield bond ETF) breaking down from a 5-year rising wedge


TNX (Daily). The 10-year Treasury Yield had a very wild day yesterday after it broke down from a falling trendline. Recall that this is positive for Gold and negative for US equities.



CURRENCIES

The USD had a parabolic rally with 12 consecutive weeks of gains. It's finally taking a pause here.


Sentiment analysis says it all.

The Smart Money (Hedgers) are very bearish on the dollar while the Dumb Money (Optix) is very bullish.


The opposite is seen on the Euro - with smart money being bullish; dumb money bearish.


GOLD:

Major breakdowns occurred across the board for commodities in Sept. They are now back to major support. Let's start with Gold and Gold miners

Gold, Silver (Weekly) are both on multiple support.


As expected, the Gold:Silver ratio (Weekly) is also on support.


Over to the gold miners, we see that GDX (Monthly) is at 18-year support


GDX, HUI (Weekly) are possibly forming a double bottom here


GLDX (Weekly) is testing the bottom of its 1-year trading range

The HUI:GOLD ratio (Weekly) is retesting its 3-year falling channel breakout as new support.


Finally, the Smart Money (Hedgers) are very bullish gold while the Dumb Money (Optix) is very pessimistic on gold



COMMODITIES

Both REMX and URA (Weekly) are back on long-term falling support lines. Given their steep declines over the past 5 weeks, expect at least a bounce here


Similarly, XME (Weekly) is on falling support as well.

CCI:SPX (Weekly) has been rallying after retesting a falling wedge breakout. 

That's all for now. Hope you found this analysis useful.