Wednesday, November 25, 2015


As we all know, oil, the world's most important commodity, has been mired in prolonged bear market that has spent much of 2015 threatening to test the lows of the 2008-2009 financial crisis when Crude bottomed out near $30/barrel.  Below is a weekly chart for Crude and we see that since moving in a big sideways range ($80-$110/barrel) from 2011 to 2014, oil has fallen off a cliff and now sits down near $40/barrel.

Kimble Charting Solutions notes that Crude's current streak of being below its 200-day moving average is its longest ever.

This type of action begs the question: Is there any support in place to allow oil to bottom here and head higher?  Or is it bound to revisit the 2009 lows and potentially even lower?

Goldman Sachs thinks the commodity is destined to head toward $20/barrel based on surging supplies.  This from Ambrose Evens-Pritchard in the Telegraph:

"The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.

Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.

Oil has fallen from $110 a barrel early last year and is hovering near $40 for US crude, and $44 for Brent in Europe…

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted...

“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.” 

“What has saved us so far is that China has been buying 200,000 to 300,000 barrels a day (b/d) for their strategic reserve,” he said."


Making matters more complicated for oil, and all commodities for that matter, is the strength of the Dollar.  As the weekly chart below shows, the US Dollar is near a long-term high and to our eye is doing either one of two things right now: 1) Putting in a big double-top at this level which, if rejected, will send it falling or 2) consolidating here before busting through higher and creating even more problems for the commodity sector. 

The ratio chart below shows the UUP (Dollar ETF) vs. USO (Oil ETF) and the inverse relationship they've had over the last year.  The Dollar's strength has been a negative for oil and its attempt to find a firm bottom.  What's also interesting is the potential double top in the spread ratio (yellow line). 

How oil resolves itself will have a meaningful impact on the global macro markets (stocks included).  Energy names have been decimated this year and that's most definitely contributed to some of the S&P's lackluster behavior.  As for which way it ultimately breaks, we'll let the pundits argue over that.  For now, we're content watching and observing free of biases.  We can participate once a definitive trend has been established.

Sunday, November 22, 2015

Week In Review (11/16 - 11/20)

Stocks finished higher again this week with the S&P 500 gaining 3.3% and the Nasdaq Composite, as it has all year, outperforming with a 3.6% gain.  The tech-heavy Nasdaq is now up 7.8% year-to-date and stands just 1% from all-time highs.  Meanwhile, the S&P is up 1.5% for the year, the Dow Jones Industrial index is exactly flat and the Russell 2000 still lags behind with a loss of 2.4% in 2015.

The chart below from Bespoke offers comprehensive look at key ETFs from just about all asset classes.

After last Friday's tragic events in Paris, it was fair to expect to some volatility this week.  Thankfully those fears never seemed to materialize as the market got the week's lows out of the way early on Monday and pretty much didn't look back.  Taking a broader view, the S&P is now bumping up against an area of resistance that's given it fits this year.  This SPY chart from Urban Carmel shows how the index has been rejected each time it's ventured into the 2,100 - 2,130 area.  It seems like a given that the market will look to probe this area once more before year end.  We'll see if it ends with a more positive result the next time around.

As is mentioned every year, we've now entered the strongest seasonal window for stocks and it will be interesting to see how the next month and a half unfolds with the December Federal Reserve meeting looming in the background.  Speaking of seasonality, we came across a fascinating article this week by Steve Deppe that examined the TOY (Turn of the Year) Barometer that was created by quant analyst, Wayne Whaley.  The full article is linked here but essentially Whaley set out to uncover the "King Pin of seasonal barometers" by in his words:

"I implored my computer to take a few seconds to exhaustively study S&P performance over every time period of the year and determine which time frame’s behavior was proprietor of the highest correlation coefficient relative to the following year’s performance.”

His findings were pretty remarkable.  Per Deppe:

"What he found was that the performance of the S&P 500 Index over the two-month time period from November 19th to January 19th was remarkably effective in predicting the forward looking twelve month returns for the index, specifically from January 19th to the following January 19th.  Wayne decided “Since this two-month time period (Nov19-Jan19) extends across the Turn of the Year (TOY) and encompasses the gift giving season, I have coined it the ‘TOY Barometer’...

The “TOY Barometer” is calculated by measuring the S&P 500 Index’s price-only return from the close on November 19th (or the preceding Friday’s close if the 19th’s on a weekend) through the close on January 19th of the following calendar year (or the preceding Friday’s close if the 19th is on a weekend). “TOY Barometer” price-only market returns that exceed 3% are considered “bullish” signals, which historically suggest the S&P 500 may be headed to “infinity and beyond”. “TOY Barometer” returns that fall between 0%-3% are considered “neutral” signals and have far more normalized returns. “TOY Barometers” that happen to be negative are considered “bearish” signals and tend to be a harbinger of bad things to come for stocks. Just how successful has the “TOY Barometer” been in predicting the forward returns of the S&P 500? Let’s take a closer look…


You can see the full results in the linked article but just for example's sake, Whaley found that since 1950 there have been 33 cases of "bullish" TOY Barometers where the S&P's return from November 19th to January 19th of the following year was 3% or greater.  The market went on to have positive gains for the next 12 months in 32 of the 33 years, a 97% success rate.  The "neutral" and "bearish" cases revealed equally compelling results.  We highly recommend giving it a read and looking into more of Mr. Whaley's work.

Another much talked about issue is the discouraging lack of breadth that's occurred as the market has recovered from the September lows.  We've written about it as have many others.  Those with a bullish view on this market would like to see more stocks participating in these bounces and less of a need to think up creative acronyms like FANG (facebook, amazon, netflix, google) as a tribute to the market's narrow leadership.  Stats like these below speak to that:

A couple good reads from the week that was..

Santa rally anyone?

Can Biotechs help pull the market higher?

"Risk management is boring until it's not"

Thursday, November 19, 2015

Preparing For The Fed

We've reached the point where the market now seems fully prepared for Fed policymakers to make a move at their December meeting and lift the Federal Funds interest rate by 25-basis points.  The Fed Funds futures market is now pricing in a high probability of this happening.  Per the minutes from their most recent meeting, Fed officials believed that the targeted conditions for an initial hike "could well be met" but they were certain to hedge that stance with the need to stay flexible and keep all options open.

There are many who believe that the Fed made a mistake by not raising rates at their September meeting and that crowd now seems convinced that action at the December meeting is a forgone conclusion.

Not everyone agrees, however.  DoubleLine's Jeff Gundlach might just be the most prominent of the dissenters.  This week, he cautioned that certain parts of the market are flashing yellow lights and asking the Fed to pump the brakes on a rate move.  For one, he highlighted the high yield bond market.  He observed that recently the rate of credit-rating downgrades were outpacing credit-rating upgrades.  When this ratio has gone inverted like this in the past it has preceded some of the market's more volatile periods.

His worry here is that if the Fed does choose to hike in December it could spark some degree volatility and force them to loosen again down the road.  A messy ordeal no doubt.

The US dollar is another area where Gundlach has been vocal.  He's argued frequently that continued strength in the USD could wipe out any Fed plans for a hike.  "If the dollar gets any stronger, we may see further volatility in markets, which might get the Fed nervous."  He's watching the DXY and thinks that if it goes above 100 and closes there for more than a couple of days, it could cause the Fed to delay.

“I’m against the Fed raising rates on a coin flip,” he said. “It should be something that is analyzable and defensible. One economic report is a bad reason against the context of a new low in junk bonds and nearly new lows in banks loans, plus weakness in emerging markets, the fact that the global Dow chart is very weak and commodity prices are on their lows.”

All that being said, it does appear as if Fed officials are eager to rip the band-aid off and get the first move out of the way.  This is what their recent language suggests albeit they've left themselves some wiggle room in nearly every statement.

If they do indeed initiate lift-off on December 16th, Convergex's Nick Colas suggests that Financials could be one area poised to rally.  In his words:

One group worth a look is the Financials. On the plus side are two factors.  The first is that the Federal Reserve seems set on raising interest rates at its December meeting.  Fed Funds Futures give this a 64% chance of occurring and the minutes of the September meeting out today should give more clarity.  The Financials have rallied 2.6% in the last month on the back of prospects for this event, but if you pair up the Futures market handicapping with the move in stocks, there should be more room to run if the Fed does move. Catalyst (Fed meeting) plus the start of a reaction (near term outperformance) is a good argument to own the Financials.

Compelling arguments are coming from both the hawks and the doves on this issue.  It will be interesting to see how the market reacts to the various reports and shifts in tone over the next month.  Move or no move, a pick up in volatility should be prepared for.  We have no bias in which way the market ultimately resolves itself off of this event but we will be prepared for added fluctuations.