An article in the Washington Post suggesting that Fed Chair Bernanke is unlikely to promote any significant new initiatives in his Jackson Hole speech on Friday is generating some comment in the FX market, and negative vibes in equities.
The durable goods report for July, which was just released, came in much higher than expectations at +4%, and +0.7% ex-transportation. Some elements of the report were less robust, but on balance it should be encouraging for longs.
The French bank SocGen, which has a sizable hedge fund practice, estimates that hedge funds are net short 71,000 S&P futures contracts.Â Many of those are no doubt hedges against other longs, but it does suggest that if there is is a positive catalyst, short covering alone could give stocksÂ a nice pop higher.
In FX, the Japanese set up a $100 billion fund that’s basically designed to compensate for the effects of a very strong Yen. Participants in the FX market are assuming that this means that they’ve given up on the idea of using intervention to try to force the Yen lower. Players are looking for a quick retest of 75.95, as long as someone else goes first. I would expect a lot of piling on should that level be broken.
The other notable piece of business going through in FX this morning wasÂ the work of aÂ couple of large and determined buyers of EUR/GBP, one an institution doing some portfolio rebalancing ahead of month end, the other a corporate name. The push higher in EUR/GBP propelled GBP/USD lower. The old joke about GBP is that it’s “an escalator up, an elevator down”, and the truth of the saying was borne out this morning, as the move was quick and brutal.
Spot Gold has recovered some ground this morning, as the overall tone is definitely more cautious than yesterday’s “Risk on, Pal!”Â I don’t think that there’s enough confidence to keep those who got long yesterday, and remained that way overnight,Â holding onÂ if their profits start to erode. Best of luck today.
Over the past few months, a noticeable trend in the FX market has been theÂ effort madeÂ by many central banks, whether from the Far East, Central and Eastern Europe, or Latin America, to diversify their reserves. Most exporter nations count the U.S. as a major trading partner, and the Eurozone is also a significant destination. The sellers accumulate Dollars and Euros, which have to be invested or exchanged. Until recently, most exporters, including China and Japan, were content to invest their Dollar holdings in Treasuries and other AAA securities. Now, with even long bonds offering low yields – arguably not enough to compensate for the risks of inflation and of being repaid in depreciated Dollars – central banks (“reserve managers”) are looking farther afield.
Increasingly, they are exchanging their Dollars and Euros, and instead buying bonds denominated in Canadian, Australian and New Zealand Dollars; in the Scandinavian currencies, especially oil-rich Norway, and in Brazilian Reals. The problem is that these bond markets are all small relative to those of the U.S. and the Eurozone. Another alternative is Gold. In the past, this would have been avoided because, of course, Gold pays no interest, but in a global environment of near-zero short term rates, that is no longer such a competitive disadvantage for the metal.
The chart of the GLD ETF, above, illustrates the desire of central bankers and other investors to hold something that is likely to retain its value in the event of an inflationary surge or political upheaval. Central banks typically deal in the spot (XAU) market, but the ETF accurately reflects the ebbs and flows of the demand for the metal. A sign of the times; according to Bloomberg, the GLD ETF today passed the S&P ETF (SPY) to become the largest of its kind, at $76.7 billion versus $74.4 billion,
This chart is too extended at presentÂ to look like a very appealing buy to me. The Fibonacci confluence at 174.73, roughly 5.3% below today’s closing price, looks more like a place where if I didn’t have any GLD, I might look to start accumulatingÂ a position, although a more significant pullback would of course be welcome. There are occasional reports that one of the large hedge funds that own the ETFÂ is cutting back on, or even eliminatingÂ its position; the dips of late haven’t tended to last very long.
Well, the Ministry of FinanceÂ evidently did not instruct the Bank of Japan to intervene to weaken the Yen last night, nor, apparently, has it done so thus far this evening. In the meantime,Â dealers took the Dollar up about a Yen from the recent low of 75.95; it is currently trading at 76.85. The Yen was given a nudge down last night when Finance Minister Koda warned that he was getting really, really, mad, and could act at any moment. Talk is certainly cheaper than intervention, as long as it gets the job done, and thus far shorter term players seem content to sell Yen, since that’s working. In addition, there’s now some political uncertainty, since Prime Minister Kan has announced that he is stepping down – which was widely anticipated – and that a new Prime Minister will be chosen on August 30. Japanese stocks, led by exporters, are up about 1 per cent in the early going.
I have to admit thatÂ after a couple of weeks of fun and games, today was beyond boring. We saw some flows in the morning, with reserve managers – central banks and sovereign wealth funds – buying reasonable amounts of Australian and Canadian Dollars, and, more unusually, Sterling. By the time the London fixing rolled around at 11 EDT, the day was pretty much done, and only the metals desk sounded lively. Since the big event of the week is Fed Chair Bernanke’s speech at the Kansas City Fed’s annual gathering at Jackson Hole, and that doesn’t occur until Friday, this has the potential to be a long week. Plenty of people are on vacation, and August is traditionally on the slow side, so perhaps my complaints are misplaced. Today would have been a terrific day for golf.
Watch this quick video to understand how Market Character changes as the Bear approaches….
It’s Sunday evening in the U.S., which means that it’s Monday morning in the Far East, with currency traders already hard at work. There has been a good deal of speculation that the Japanese authorities will intervene to drive the Yen lower. A Yen at the current level, around 77 per Dollar, makes Japanese goods very expensive overseas, which in turn reduces exports, hurts the earnings of exporters, and slows the economy.Â Taking a look at a 5-year chart brings home the scope of the problem; in 2007, the USD/JPY rate was close to 125, meaning that the Yen is roughly 38% stronger now. That’s a pretty strong headwind for an export-oriented economy to face, and it becomes stronger with every additional increase in the value of the Yen.
It might be worth taking a minute to discuss the mechanics of central bank intervention. In the case of Japan, the Ministry of Finance, which is roughly analogous to the U.S. Department of the Treasury, instructs the Bank of Japan, which in the U.S context would be the Federal Reserve Bank of New York, to intervene. The BoJ’s traders have several options; they can leave orders to buy Dollars and sell Yen with local banks (many traders believe they were already doing this last week), they can place orders on the electronic dealing machines (Reuters and EBS are the largest), or they can call banks directly, ask for prices, and buy Dollars. They’re capable of dealing in enormous amounts; billions, perhaps tens of billions, of Dollars. They can also ask other central banks, including the New York Fed, to intervene in their own time zones. In general, non-Japanese finance ministries and central banks, not convinced of the utility of intervention, have been reluctant to do so.
The last time I was on a trading desk when the New York Fed came in on behalf of the Bank of Japan, the trader at the Fed made it very clear that this was done to accommodate a central bank peer, and did not represent the policy of the U.S. authorities. In fact, it was so early (6:45 AM or so in New York) that the local market was barely awake. When my trader made an ill-informed priceÂ that would have resulted in a certainÂ loss, the Fed trader, instead of dealing, simply asked him to refresh the quote, and then dealt at a price that was much better for my shop, and by the same token, worse for the Bank of Japan.
A peculiarity of the Ministry of FinanceÂ is that it prefers to intervene when the market is largely complacent and positioned poorly. Because the noise level was so loud over the weekend, it’s hard to believe that any professional trader will be caught by surprise if there is intervention in tonight’s session. This may be enough to convince the Japanese authorities to postpone an assault, in the hope that they can get more bang for their Yen in the future. Their track record has been mixed, and over the long run, as the 5-year chart indicates, they haven’t been successful in doing more than giving traders better opportunities, on occasion, to short USD/JPY.
We did break the 76.25 level on Friday; this was supposedly the “line in the sand” that would provoke an all-out attack by the MOF and the BoJ. Although plenty of stop losses got done on the break – the Dollar got as low as 75.95 – it rebounded pretty quickly, and my sense is that many short term traders are now long Dollars, hoping to take advantage of intervention to sell higher, and then perhaps sell Dollars again from theÂ improved levels. Should the previous low break, I would expect plenty of Dollars to get sold again, but at the moment, we’re almost a Yen higher, at 76.86.
For those involved, or considering getting involved, best of luck, but be careful; when intervention is happening on a large scale, stops can get done some distance from where the orders are left.
In part 1 we said that we could evaluate whether a Market was a Bull or Bear depending on the:
Now we’re getting to the real meat of the matter – Price Action. How can the price tip us off that we’ve entered a Bear Market? , we’ll reveal some of the usual technical signals associated with the warning of an impending Bear…..or the confirmation that we’re in one. Â
We all know as traders that a downtrend is defined in Dow Theory as a “series of lower highs and lower lows.” But WHICH highs? Which lows? What timeframe?
A Bear Market doesn’t truly begin until we see a “lower high” on the Monthly chart, preceded by a deep “lower low.”
And, of course, that “lower low” was more than likely the “shot over the bow” that we discussed in part 3. Far too many traders try to hop onto the Bear Market way too early, before the initial move has proved that it’s anything more than a correction. When the Bear truly does come, the trap door will open and there is no refuge. Let’s show an example of this from the last Bear, which started near the end of 2007.Â
The initial “shot over the bow” came in July of 2007; on the daily chart this created a series of lower highs and lower lows, and the move lower “took out” the prior intermediate low:
You can see that those who were early jumping onto the Bear Market were surprised beyond belief that the price went to new highs! In fact, this is a very common pattern going back over a hundred years….Bull Markets die very reluctantly. So…maybe if we stretch our timeframe out to the Weekly chart we can avoid those initial wiggles? Let’s see the same time period on the Weekly chart:
Now we’re getting somewhere. Sure, at the time, it feels as though the entire Bear Market is slipping away without you, but in reality if you waited for the Weekly Lower High to form, it was less than 150 points from the previous major swing high.Â If we take one more step back from the daily fray, we can see that the Monthly chart actually shows the cleanest read on the price action, with a well-defined “lower low” followed by a failure at the “lower high”.
At that point, the route is on and you were able to save yourself from all the uncertainty and chop that preceded it, which took the better part of a year to play out. It can sometimes take a long time to turn the Bull Market “battleship” around, but when the necessary groundwork is done to turn the larger-timeframe charts, the fall can be very swift. On the left side of this chart, you can also see how the 2000-2002 Bear market played out; it also showed the same heavy volatility before it finally gave way to gravity.Â
I think what we’ve shown through this four part series of articles is that the initial move that we’ve seen in July/August 2011 mirrors many of the characteristics that we’ve identified as the opening salvo in a Bear Market. We have everything in place except for the Relief Rally and the final “lower high” setting up on the Weekly and Monthly charts. Perhaps this time will be different and prices will just drop off the cliff from the May 2011 highs without bothering to set up that final lower high, but I haven’t seen any examples of this occurring in the past. In addition, the Federal Reserve is going to keep interest rates extremely low for the next two years so it’s very likely that investors will not have any place else to park their capital but “bargain” equities that have been distressed by this summer 2011 opening salvo to the downside.Â
So no, it’s not a Bear Market just yet, but it has the potential to quickly turn into a very nasty one.Â
The first thing that you can do is to study the Bear because you’ll have some time to prepare after the initial “shot over the bow” comes to pass. It will be accompanied by gloom and doom and a feeling like the “end of the world” is upon us, especially if you make your living from the market. What will come next will surprise most people not familiar with how Markets move, as the relief rally will wipe out all those shorting at the bottom of the initial move. Sometimes this relief rally will lead to new highs, sometimes not. In any case, if history is any guide, you will have several months in which to get your affairs in order.Â
First off, if you are heavily long Stocks or other assets, you can look to distribute your inventory into the relief rally and lighten up your long exposure, perhaps even starting to scale into some inverse funds. Those who are adept traders can play the initial relief rally as an opportunity, as there will be plenty of quality issues at a deep discount……but look to unload them during the rally when the news is the sunniest. The top of the relief rally will be accompanied by the typical Euphoria and the feeling that “we dodged a bullet this time!” but it’s definitely a time to be light and nimble and not overweight long. The Relief Rally will eventually crumble in a fractal pattern, starting with intraday charts and then setting up a “lower high” followed by a “lower low” on the daily chart, which will then lead to the same on the Weekly and eventually the Monthly charts. The cascade becomes an avalanche when the Bear truly kicks in.Â
If you are an Options trader, you have many more avenues open to you to trade the Bear; you don’t have to run to cash like most of the Stock players. In the next series of articles I’ll illustrate how to play the Bear a little differently using Options.Â
NYSE invokes Rule 48 at open; allows exchange to suspend price indications to allow for a smooth opening. This is only invoked in situations with potential for extreme volatility.
Good Morning. As a quick follow up from last night’s post, the Swiss National Bank in its operations this morning signaled no further desire to push rates still lower, acting instead to stabilize the current rates, which in the 3-month area are now around -51 basis points. Euronerves have been shaken by reports that German Finance Minister Schaeuble, in a letter to legislators, stated that the European Financial Stability Fund will not be increased from its present level (EUR 440 bn) calling into question Germany’s willingness to spend any additional funds to aid Italy, Spain, et al in case of need. Central banks continue to buy Sterling and Scandinavian currencies. Market players have expressed some concernsÂ about the intentions of the Japanese authorities, with stealth intervention rumored ahead of the presumed “line in the sand” at 76.25. Best of luck today.
This is my first effort at providing my fellow students at TradingConcepts with updated information, views and impressions from (primarily) the foreign exchange market, where I spend my working days. I’ve learned a tremendous amount from Todd Mitchell, and it has helped me to navigate charts in a variety of time frames, and to structure trades based on my reading of those charts. At the same time, the FX market generally trades in reasonably well-established ranges that broadly reflect what is discounted, or “priced in” at any given point in time. Players in the FX market normally discount new information immediately, and on occasion their sense of fundamentals will change enough to create a new range, which of course involves violating previous resistance or support. This in turn generally leads to widespread triggering of stop loss orders, and a spike in volume and price. While a new range will become quickly inscribed in the charts, it can be helpful to be aware of what other market participants are talking about, anticipating, and fearing, so that the potentially negative effects of being caught in as a range changes can be mitigated,Â if not always completely avoided.
With that said, we had one potentially range-altering item on the docket today, and it proved to be largely a dud. On Tuesday, the market was abuzz with very specific talk that the Swiss National Bank was about to peg the Swiss Franc to the Euro at a rate of 1.2025. This at first seemed unlikely, since the existence of a peg would obligate the SNB to intervene as needed to defend it, potentially adding to its already huge and hugely unprofitable EUR reserves. Still,Â from a low of 1.1165 the EUR/CHF cross ran up to 1.14 and change. The cantonal (regional) banks, politically well plugged in and normally well informed, were seen buying aggressively on the move higher, as were a number of hedge funds. The presence of these typically astuteÂ EUR/CHF buyers gave some credence to the rumors.
In point of fact, the Bank did act aggressively in the forward FX markets, dealing in 3-month swaps at levels that pushed Swiss money market rates below zero. The Bank also promised to continue providing more than ample liquidity. The Economics and Finance ministers appeared at a press conference at which they pledged the government’s full support to whatever measures were deemed necessary by the SNB. Given the difficulties faced by the Swiss export sector as a result of the use of CHF as a safe haven currency, there is no doubt strong support within the country for a weaker currency.Â The SNB did at times in the past have some success in reversing a strong upward trend in Swiss by imposing negative interest rates, but that was during periods when money market interest rates were generally high in the developed world. There was thus a real cost attached to holding Swiss as opposed to, say, Eurodollars yielding north of 10%.
In the current low interest rate environment, the opportunity costs are much less, and investors’ desire for safety is such that a small degree of negative carry may seem a cheap price to pay for a degree of security. Even the Yen, which in terms of real return offers a negative interest rate, is a prominent haven at present, as is Gold, which of course pays no interest at all. Under the circumstances, the SNB appears to have its work cut out for it. There was some disappointment at the lack of a peg, and the cross came off a high of 1.1555 roughly two big figures, to 1.1349. Still, the market as a whole appears willing to see if the intervention in the forwards, and possibly additional steps, are successful in the short term. Given the strength of the move in the European afternoon on Tuesday, I would have expected even a stronger corrective move today.When FX profits in crowded trades begin to erode, those who are slow to take them often have few left to take. We’ll see how it goes overnight.
In the course of the day, my desk did see central bank reserve managers buying SEK and NOK, which might have been expected, but also GBP, MXN, and BRL, which are more aggressive choices. One theme this year has been the drive by central banks and sovereign wealth funds to diversify their reserves away from Dollars and, to a lesser degree (since they don’t own as many) Euros. The Canadian Dollar is also a beneficiary of this reserve diversification, but the close ties of the Canadian economy to that of the U.S. tend to make potential buyers cautious when the USD is under pressure. On those days, USD/CAD weakens, but CAD underperforms on the major crosses.
In any case, I’ll make an effort, as noted at the outset, to offer my take on what interbank dealers and institutional investors are fretting about and contemplating as reasons to alter their holdings. The trend is our friend until it’s broken; I’ll try to provide some early warnings as to what might provoke the sort of move that makes for funny chart patterns. The decisions made by the major market players will be reflected in due course in the charts, and when trends are developing, they can be traded very profitably by using the methodology taught by Todd.Â Hopefully, this blog will help to preserve capital from time to time, when the market’s attention, and ranges, are shifting.
In part 1 we said that we could evaluate whether a Market was a Bull or Bear depending on the:
In Part 3, we’ll reveal some of the usual technical signals associated with the warning of an impending Bear…..or the confirmation that we’re in one. Â
In practice it can provide a good objective signal providing a distant warning of an approaching Bear, as this signal did in December of 2007: (red = 50dma, green = 200dma)
Like any moving average crossover system, though, it’s prone to false signals. Here’s an example of a much-publicized “death cross” in the summer of 2010 that did not pan out:
So here we are in the third quarter of 2011, and we once again have the feared “Death Cross” signal:
What can we conclude from this signal? Just because we currently see the Death Cross in play on the S&P500 doesn’t automatically place us in “Bear Market” territory, it just adds another objective signal onto our analysis. Seeing the signal improves the odds that the Bear has begun, however.
The two last Bear Markets that we’ve experienced blew these readings away with distributions of 51% in the 2000 – 2003 Bear, and 58% with the 2007-2009 Bear. When the Market is truly in a Bear Market, there is no where to hide and it’s quite obvious….however the strongest drops come near the end of the cycle. Again, this is why it’s so difficult to identify the Bear early on, as a simple correction in a Bull Market may be falsely interpreted as the start of the Bear. Witness the 2010 correction of 17.2% on the S&P500; many had erroneously figured that to be the beginning of a new Bear Market, but we saw a 36% rally tacked on after that distribution, many on the backs of “weak hand” Bears that wrongly shorted the Market at the wrong time.
And where are we now after the recent panic? The July/August 2011 distribution left the S&P500 down 19.6% from its May 2011 highs – so far, just a correction.
Prior to the Tech Bubble crash, we saw a clear signal “shot over the bow” that warned of instability approaching:
And again in 2007, the upcoming Bear announced itself several months ahead of time:
You can also clearly see that the summer of 2011 has brought with it its own “shot over the bow” move with the panic of the US downgrade. Â This by itself does not confirm a Bear Market, but it becomes one more data point to put on the pile of evidence to stack the odds in your favor when you make your read.Â
In Part 4, we’ll discuss the Price Action that can warn us of the approaching Bear, or confirm the fact that we’re in one.Â
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