Saturday, July 14, 2012

Links of Interest 7-14-12

7 Signs to watch for an upcoming recession- via Barry Ritholtz-

Chinese premiere Wen talks about China's need to take action...

.... while Chinese Industrial Production is up 9.6% but,

Chinese economic data is questioned

In the U.S., more evidence mounts that the Housing bust is over

After at least three cities in California have gone BK. Some claim bankruptcy not a trend

 And they could be right

The potential benefits from QE3 on hard assets may be overstated. It is better to watch China

Insights into better decision making

Is the commodity supercycle over? (Our Note- Probably not as long as the developing world continues to develop)

Friday, July 13, 2012

Abbreviated Morning Post- 7-13-12

With the release of a number of important earnings updates, monetary statistics and few other reasons, this will be be an abbreviated morning post.

First, we note the powers-that-be in China announced that Q2 GDP gained 7.6%, below estimates. The slowdown in GDP was largely priced into the market however, and Asian and European stock markets are higher following the release.

This includes futures that are higher in the U.S., probably on a combination of the reduction in uncertainty and on the potential of further Chinese stimulus.

As for the S&P 500,

The S&P 500 spider is trading below the 50-day moving average, a near-term resistance level above the $134 price level. The market may test this resistance level, but we think that if downside volume comes into the market that it increases the odds that the SPY goes to the 200-day moving average or lower.. 

The UUP traded above the resistance level in yesterday's trading on volume greater than whats has been seen in June. Trading was choppy and the ETF closed towards the middle of the days trading range. We think that this suggests indecision on the part of traders and investors. This remains one to watch.

Thursday, July 12, 2012

Traders Edge 7-12-12- Something afoot in the currency markets?

The stock markets in the U.S. are set to open lower, tacking on more losses following yesterday's sell off that accompanied the release of Fed minutes- which lacked the signs of the monetary fix many traders were looking for.

We continue to believe that the market will be range bound, but would look for signs of increased volume to indicate any potential break out or break down.

We are witnessing an interesting setup in the currency markets.

The U.S. dollar, as exemplified by the PowerShares U.S. Dollar Index ETF (ticker UUP), cannot seem to get through the resistance set at the end of May. The last significant volume push came in May 15 and volume has been in decline since, indicating a lack of upside support in the most recent move. In addition, we note that a divergence has opened up and both the RSI and MACD are weakening. This is occurring while downside volume came into the UUP on 29th of June, indicating that the UUP may come back into the $22.40 range at the very least. 

As for the Euro, shown here as the Currency Shares Euro trust (ticker FXE)...

.... we are seeing a significant divergence in the price of the FXE and the RSI/MACD. This is while the price is in an oversold range. On a short-term basis, the sell-off since July 5 (and push below the May 31 low) has occurred on lower volumes. This is an interesting set up and may suggest that relief rally may be at hand for the beleaguered currency, this thought is tempered though by our belief that the debt problems in the Eurozone will persist.

Wednesday, July 11, 2012

Update on Gold Chart- Timing the XAU

We realize the chart analysis we provided this morning (showing the price of the XAU and the relative price of the GLD to M2 money supply) was short in duration. So, we expanded the time frame to the beginning of 2000 and substituted the GLD for the price of gold. Here is the chart.

If you think it would be a good time to buy the XAU when the standard deviation of the relative price of gold to M2 money supply was less than -1, then you would be correct. At least by the historical relationship. Since the beginning of 2000, the XAU has averaged a 3-month, 6-month, and 1-year average return (for any respective day) of 3.1%, 6.8%, and 14.7%, respectively. In you also work through the math, the Sharpe ratio of these returns work out to be 0.21, 0.32, and 0.54, respectively.

We built a simple trading strategy around the standard deviation of the gold price relative to M2 money supply. The strategy assumes you bought the XAU at any point when the standard deviation was less than or equal to -1. Using this strategy, the 3-month, 6-month, and 1-year return average is 8.2%, 18.8%, and 31.2%, respectively. Significantly better than the average buy-and-hold case. The strategy also appears to reduce the overall risk in the trade, as the Sharpe ratio for these periods work our to be 0.42, 0.77, and 0.95, respectively.

Traders Edge 7-11-12- all that glimmers

 A few quick updates. We increased our exposure to gold stocks in yesterday's trading- via the purchase of the Tocqueville Gold Fund (ticker TGLDX). It continues to be our thesis that the World debt crisis will result in further money printing by the central banks, leading to hard assets outperforming other investments. some charts for illustrative purposes. First a chart of the Phily Gold/Silver Index (ticker XAU). The index is down more than 25% from the high this year, has tested the 2010 lows, and looks to be consolidating. 

We also note that the price of gold looks to be consolidating also......

...while the XUA is trading significantly lower relative to the price of gold.

Lastly, we thought this analysis is particularly noteworthy. This shows the price of the XAU index and the standard deviation of the relative price of the gold ETF (ticker GLD) to M2 money supply. Buying opportunities on the XAU appear to arise when the standard deviation falls below -1. The current reading is -1.13 and we doubt that the money printing by the central banks will abate any time soon.

Tuesday, July 10, 2012

Traders Edge- 7-10-12

The risk off trade was alive and well in the coal stocks, as Patriot Coal went BK. This is one docket that may be worth watching, as the 1.9 billion in coal reserves may make the bankrupt bonds worth a look. Take that with the caveat that the company does have large pension liabilities that may make any trade not worth the investment.

Some quick charts.

We thought this was/is an interesting relationship. The above chart shows the three year track of the the spot wholesale price of gasoline and the S&P 500 spider. The relationship looks fairly tight. We mention this due to the call for a further decline gasoline prices.

The above two charts show the UUP and the UDN or the Powershares Dollar Index Bull Fund and the Powershares Dollar Index Bear Fund, respectively. The UUP looks somewhat overbought on the stochastic, but the volume characteristics suggest more of a consolidation. Interestingly, the UDN shows interesting volume characteristics with the decline in April and May have little volume support while the rally off the June lows occurred on increased support. This is a dynamic to watch considering the risk-on/risk-off trade in regards to the machinations of global money printing and economy.

Monday, July 9, 2012

Bullish on Coal Stocks- Thermal to Lead the Way

We believe that coal stocks are offer investors a unique value opportunity, that is if you can sleep at night and hold on through the volatility. Short-term, many of the coal stocks appear to be setting up for another run upwards. See the below charts.

The stocks of these companies and the coal stock ETF (ticker KOL) show an improving MACD and RSI, with the trend in both measures diverging from the price trend in June. In addition, the money flow in these names is improving, suggesting increased investor interest. Lastly, the downside volume over the last two days has been below the upside volume seen in late June, which in our opinion is a setup for further price increases.

Why the improvement in the pricing? It is our opinion that thermal coal pricing in the U.S. is set to improve. First, the price of the natural gas has increased significantly off the lows, making the economics of switching to gas from coal less appealing for utilities. Second, the expectation for further hot weather in U.S. has increased the likelihood of greater energy production in the weeks ahead. Another positive indicator is that the World is turning more towards cheaper coal imports to supply their energy needs- remember that natural gas trades at significantly higher prices in Europe and Asia thus making coal use more economic.

Lastly, we show the last three charts for illustrative purposes.

The top chart shows the stock price for Cloud Peak Energy (ticker CLD), the producer of thermal coal from the Powder River Basin, a large coal producing region in the U.S. There are many types of coal based on criteria including heat content, hardness, and impurities. Two broad types of coal are thermal coal and metallurgical coal. The former is used in the production of electricity while metallurgical coal is used in steel production. CLD is an exclusive producer of thermal coal and you will notice the stock's relative strength in recent months not only to the other coal stocks but also to the market as a whole (second chart). To us, this suggests the growing interest in thermal coal.

The bottom chart in the deck shows the stock price of CLD relative to the stock price of Walter Energy (ticker WLT), a large producer of metallurgical coal. We think this relative chart further shows that investors are betting that thermal coal pricing is set to improve. The bottom chart also shows the price trend of natural gas. Although some of called for the price of natural gas to pull back after its recent run, we find it hard to believe that investors will double down on a trend that would be short lived.

Investors should consider, or at least begin looking at, an equity stake or purchase of convertible debt in coal companies.

Traders Edge- 7-9-12... Risk Off, Look out Below

The stock markets in the U.S. are set to open lower, following stock markets around the World. The risk off trade that began on Friday, following the release the disappointing jobs report, looks to continue.

Market pundits and writers are talking more about the possibility of recession in the U.S., which we think is unlikely at this point provided that monetary aggregates show continued growth, albeit growth at or near stall speed. We think this points to a slowing in the economy, but not a recession just yet. Surprisingly, the U.S. dollar index is trading down in early morning trading, as both the Euro and Yen are trading up versus the greenback.

Some quick chart reviews----

As shown in the tables above, the Asian markets are trading lower with both the Nikkei and Hong Kong Indeces off by more than 1%. The chart above shows the Ishares FTSE China 25 Index. The index has been trading in a sideways to a slightly positive path since the end of May. This trading action has been on light volume versus the downside action earlier in May. Despite a rising MACD, the RSI has flattened and the stochastic is an overbought range. The index may retest the recent lows around $32, where investors should get more information about the path of the Chinese stock markets.

As for the U.S. markets. the SPY shows a similar technical pattern on the RSI, MACD, stochastic, and volume characteristics. This setup, and our economic views, leads us to conclude that the market will be range bound.

Although its prominence has diminished in recent years, Alcoa (ticker AA) kicks off second quarter earnings season this evening. The Consensus is looking for $0.06 EPS on revenue of $5.8 billion, both down from the year ago period. EPS estimates for AA's second quarter have been declining over the last three months, suggesting expectations have already been tempered for the company. Although we have not researched the fundamentals of AA and the upstream/downstream aluminum industries in some time, we think the technical picture looks interesting, and note that shares have traded largely flat for close to year (although in 30 percentage range) and our long-term technical indicator looks positive. Trading action versus AA's results may be a telling sign of things to come for the economy and investment markets.

AA's chart

Our long-term technical indicator for AA's shares- in this model a low indicator is a positive occurrence.