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My observations on financial markets

Updated: 2018-03-02T18:22:54.763+02:00


Believe Your Eyes, Not Your Brains. Ask Yourself What, Not Why.


Seventeen thousand money managers around the globe pay to use BlackRock’s Aladdin risk assessment platform to manage $15 Trillion.  Therefore, nearly 7% of the world’s $225 Trillion in financial assets are being managed by people who all ponder the markets using the same tools.  As a result, 30,000 of the world’s most significant investment portfolios are kept track of by Aladdin.  And so, by default, any flaws in the system matter to every investor, not just to Aladdin subscribers.
It is my belief that there is no professional out there who truly understands the truckloads of reports and analysis that Aladdin regularly produces.  Certainly there is no way for individual investors to do their own legwork and come up with the equivalent of Aladdin’s risk models, but I submit to you that this should never be our focus.  Instead, let your eyeballs do the work.  What matters most is not why these 17,000 money managers vote with their dollars in a particular manner.  What matters most is that we see where they are deploying their assets and what they are voting for.  Believe your eyes and not your brains.  It’s their gigantic footprints that they leave all over our charts that really matter.

Gatis Roze -  Believe Your Eyes, Not Your Brains Ask Yourself What, Not Why

Humility in Trading


Don't be a hero. Don't have an ego. Always question yourself and your ability. Don't ever feel that you are very good. The second you do, you are dead.
Paul Tudor Jones

Technical Analysis Applied to Long Term Investing


Moving averages have captured the imagination (and increasingly the managed money) of advisors these days, and it’s easy to see why, at least through the lens of history. Consider a simple strategy benchmark with an initial weighting of 60% stocks (represented by the S&P 500) and 40% bonds (by the Barclays Aggregate Bond index). Buying and holding this mix earned you an annualized total return of 7.7% for the 20 years through August 2012 while it gave you an annualized volatility (standard deviation) of roughly 10.7. By contrast, your performance would have considerably improved with a market-timing strategy that adjusted the same initially weighted allocation using signals from a simple 10-month moving average (roughly the equivalent of a 200-day average). You would have seen a return of 9.3% a year and volatility of 7.9 (see Figure 1).Here’s how the moving average strategy in Figure 1 works: When the equity index falls under its 10-month moving average (based on monthly data) at any month’s end, the entire stock allocation is moved to cash (three-month T-bills). There it stays until the equity index closes above its 10-month average, at which point all the cash is shifted back to stocks. The same rule applies to bonds. In short, the equity portion of the portfolio is either in stocks or cash, and the remaining fixed-income allocation is either in bonds or cash. The result is that this moving average strategy would have sidestepped the worst of the corrections and crashes. If that sounds familiar, it’s because similar results have been documented in numerous studies through the years.Figure 2 shows the differences in one-year returns for the moving-average strategy minus the returns for the buy-and-hold strategy. The dots above the zero mark indicate that the moving-average strategy outperformed for the trailing-12-month period, and vice versa. For much of the past two decades, annual returns between the two strategies shared relatively similar results. But the differences widened dramatically around and during recessions—overwhelmingly in favor of the moving-average strategy.For this reason, finance professor Paskalis Glabadanidis calls moving average-based strategies the equivalent of an “at-the-money put option combined with a long position in the underlying risky asset” (a quote from his working paper, Market Timing with Moving Averages.) In other words, the main value of moving averages has kicked in when the market has trended lower for an extended stretch—a bear market.None of this should be surprising, says Adam Grimes, the chief investment officer of Waverly Advisors and author of the recently published book The Art and Science of Technical Analysis. “The major crashes usually come well after warnings signalled by technical weakness.” The steep sell-off in the stock market in late 2008 and early 2009, for example, started about a year after equities set new highs. Soon after the peak, investors saw a series of warnings in the moving-average signals.That’s not unusual, notes Grimes. He adds, however, that there’s nothing magical about 50- or 200-day moving averages—or any other rules for calculating average prices. Moving averages, in all their variations, are simply tools that quantify some of the “repeatable patterns that illustrate the psychology of the markets.”The main advantage of looking at prices through the prism of trailing averages is that it takes a lot of the emotion out of analysing market trends, he counsels. “You’d be much better off with this than making emotional decisions,” Grimes says. Is it foolproof? No, of course not. “We don’t deal in certainties—we deal in probabilities.”Source:  (Re)Discovering Technical Analysis[...]

The GOLDen Consolidation Range


In the previous post discussing Gold in January 2011, it was said that “the next target after the following likely correction is 1600 which may be touched in January – March 2012. Nevertheless, we should be aware that the uptrend may accelerate and become exponential at some point and even higher highs may be registered in a shorter cycle than the regular 34-week cycle.” After a shorter than expected correction, the uptrend indeed accelerated, tested and exceeded 1600 target in July 2011 overshooting towards 1900 in less than two months before collapsing back to 1600 area. Since September 2011 Gold is moving in a consolidating range between 1550 and 1800.In the weekly chart above we have the 34 and 21-week cycles centred on the September 2011 important plunging low. The projected cycles point us to end-of-December and beginning-of-January as potential important inflection interval.In terms of price we notice Gold is in the upper half of the mentioned range which improves the likelihood of a breakout higher in the direction of the long term uptrend thus putting an end to the long consolidation period. Nevertheless, a break below the mid-range around 1675 will most likely keep the price in the same range or even threaten the 1550 support area.In the daily chart above we have 55-day cycle centred on the latest significant low from May 2012. The projection gives us beginning of January as a potential inflection period.We notice Gold broke into the upper half of the range in September 2012, travelled to the 1800 resistance area then corrected 61.8% of the latest up-thrust which coincided with the 1675 mid-range. The upturned that ensued was capped so far by the 61.8% (1750) of the latest downtrend but the price is still in the upper half of the range.1750 and 1800 levels are deemed as key for the next move in Gold. If 1750 is exceeded, Gold can challenge 1800 and stage a breakout in the direction of the long term uptrend. A break below the mid-range around 1675 will push the price back in the lower half of the range and may even threaten the 1550 support area.[...]

US Homebuilding Stocks Gave Early Signal of Housing Top and Housing Bottom


THIS IS WHY WE FOLLOW CHARTS ... We've been treated to a lot of bullish news on the housing sector over the last month. Builders broke ground on more homes during October. Residential construction rose last month at the highest rate in more than four years. Permits for new construction were 30% higher than a year ago. An index of builder's confidence hit a six-year high earlier this month. It was reported this morning that the Case-Shiller Home Price Index rose 3% for the sixth straight monthly gain in a row. That index is the most widely-followed barometer of the health of the housing industry. It peaked during the middle of 2006 and bottomed during the first quarter of this year. The main reason why we follow price charts is because they are leading indicators of any industry's fundamentals. And, once again, the charts spotted the housing recovery a lot sooner. Chart 1 plots the Dow Jones US Home Construction Index since 2000. The homebuilding index peaked during 2005 (nearly a year before the Case-Shiller index) and broke its multi-year up trendline during 2006 (red circle). That was a clear signal at the time that the housing boom was over. It took the investment community until late 2007 to acknowledge that.
HOUSING INDEX GAVE MAJOR BUY SIGNAL LAST JUNE... Chart 1 shows the home construction index hitting bottom in late 2008/ early 2009. It achieved a successful retest of that low during the second half of 2011 before breaking its major down trendline during that fourth quarter (green circle). More importantly, the housing index cleared its 2010 high during June which completed a major basing pattern and signalled a major new uptrend (solid circle). I've been writing bullish comments on the housing industry since the fourth quarter of last year based on that bullish chart pattern. It took the economic community nearly a year to acknowledge the improvement. Homebuilders have, in fact, been the strongest sector of the market during 2012, and correctly signaled that the housing industry was in recovery. Once again, the charts were early and the economic community late. I can't wait to see all of the buy recommendations being issued by Wall Street in the coming weeks. Meantime, the construction index has more than doubled in price since the fourth quarter of last year. That's why we follow charts. And why we prefer the market messages being given by charts rather than economic messages which are usually way behind the market.

Source: John Murphy's commentary on StockCharts

The Foundation of Technical Analysis


Simply stated, Dorsey, Wright focuses on the “price” of a security, because it is the ultimate determinant of supply and demand in the marketplace. When you cut through all the red tape on Wall Street, what moves stock (and thus ETF) prices is supply and demand. It is nothing more than ECONOMICS 101. We know why tomatoes in the winter don’t taste very good, don’t have a very long shelf life, and are expensive. The same forces that move prices in the supermarket move the stock market. When it’s all said and done, if there are more buyers than sellers willing to sell, the price will move higher. If there are more sellers than buyers willing to buy, the price will move lower. Therefore, recording the price action of a security can yield important information as to who is winning the battle for that security — supply or demand.

Source: Tom Dorsey about Dorsey, Wright & Associates

S&P500 Potential Downtrend Target


The S&P 500 is in a long-term uptrend on this chart and there were two sharp corrections in 2010 and 2011 (17% and 19.7%). A similar correction (18%) would carry the index to the low 1200s. There is, however, a higher support zone around 1300. The spring lows and channel trend line mark support here.

Source: Stockcharts

10-year Treasury Yield to Show the Way


Signs of strength in the economy usually push treasuries lower and yields higher. Signs of weakness usually put a bid into treasury prices and push yields lower.
Chart above shows the 10-year Treasury Yield ($TNX) hitting resistance in the 18.5-19 area and falling back the last two days. The trend since late July is up, but this failure at resistance is not encouraging for stocks. Notice that stocks and treasury yields are positively correlated for the most part. A breakout at 19 (1.9%) would be bullish for yields, bearish for treasury bonds and bullish for stocks. Downside follow through below 16 (1.6%) would be bearish for yields, bullish for treasury bonds and bearish for stocks. 
This week’s economic data may tilt the balance and we could see a decisive move after the election. Directional movement could be limited until we get some clarity on the election.

Nasdaq Tests 200-day Moving Average


Nasdaq Tests 200-day Moving Average:

With a sharp decline the last five weeks, the Nasdaq is poised to test its rising 200-day moving average. The red line is the 200-day and this key average was last tested in early June. Note that the index is underperforming the S&P 500 as the price relative moved below its early August low.


BRD - The Relative Breakdown against BETXT


Weekly chart of BRD against BETXT.

BETFI Index Rally is Taking a Break


BETFI Index marched higher and shattered the previous post discussed target area around 23 000 points (see daily chart above). The index rallied to the next resistance around 25 000 points until mentioned mid February target. Since then a distribution have started with volume-price divergence which may precede a correction back to the 23 000 area. The potential correction is supported by the emerging relative BETFI weakness against BETXT indicated in the daily relative chart below.In the bigger picture, the weekly BETFI Index before Friday close (see weekly chart below) is still trending up but pausing at the potential internal trend line resistance which may bring a correction back to the broken 23 000 points area. The up break of the 23 000 area coupled with the break of the 200 weeks SMA and a bullish 20 and 50 weekly EMAs crossover bring the index in a medium term uptrend that may target the 2010 highs around 34 000 points if last year's highs around 27 000 points are cleared. From this perspective, any pullback may be a medium to long term buying opportunity which should be reconsidered if the index falls below 20 000 points.The weekly emerging relative strength of BETFI against BETXT following the break of a 4 year under performance (see weekly relative chart below) is also pointing to a medium to long term strong BETFI index performance.[...]

BETFI Index Marches to The Next Target


As discussed in the previous post more than two months ago, the Romanian BETFI Index turned bullish and reached the 20 500 - 21 500 mentioned target area by the end of last year. As also hinted in the same post, this target area was the first stop before going higher towards 23 000 later on this year.   In the weekly chart above we see the index challenging the weekly EMA50 that proved strong resistance last year. If successful by the close of this week, BETFI next target is the 61.8% Fibonacci retracement of the 2011 downtrend, the falling weekly SMA200 and a previous congestion area, all converging around 23 000. In the daily chart below we notice the potential a-b-c correction to the 2011 downtrend with the "c" leg symmetrical with the "a" leg (that reached the previous target area around 21 000) pointing to the same discussed zone around 23 000.The break of the falling daily SMA200 with increasing volumes in the first weeks of 2012 is also supporting the daily and weekly trending index to reach the next target area around 23 000 until mid February when both monthly and quarterly cycles meet. A longer and deeper correction may follow afterwards.   As suggested in the previous post, relative to BETXT, the BETFI Index managed to break out of both daily (chart below) and weekly (chart above) underperformance trends and started overperforming the market which also support the march of the index to the next target. [...]

The BETFI Index Christmas Rally


In the context of a global equity markets rebound discussed in a previous post, the Romanian BETFI Index is poised to trend higher until at least end of the year. The critical 25 000 points support(discussed in the last post exploring the BETFI Index) gave way shattering any bullish development and starting a long downtrend that may have ended in the beginning of October.   We notice in the weekly chart above the end of the weekly downtrend around 16K at the 161.8% extension of the previous rally (roughly 20K to 27K). If the downtrend is broken next week, the index could target the 20 500 - 21 500 area until end of the year and perhaps 23 000 later on.   The daily chart below paints a bullish picture showing a 5-wave downtrend move ending around 15 500 with an October test (the 5th wave) of the August selling climax (3rd wave, notice the spike in volumes) and a broken downtrend line accompanied by increasing volume. The uptrending index could target the 20 500 - 21 500 area (previous support, SMA200 and 50% retracement of the downtrend) until end of the year. Relative to BETXT Index, the BETFI Index is still underperforming on both weekly (above) and daily (below) charts but with good chances to break the daily underperformance trend and perhaps weekly one later on. [...]

Dow Jones World Stock Index Downtrend Correction


As discussed here and here, The Dow Jones World Index moved lower retracing most of the rise from May 2010 to May 2011, as noticed in the weekly chart above. 

The downtrend had an impulsive 5-wave structure (see the daily chart below) which may have ended in the beginning of October setting up an a-b-c correction which can run until perhaps end of November or early December. When this rebound is over, the longer term downtrend could resume. 

Markets Price to Moving Average Snapshot


Most global stock market indices enter medium term green setting up an intermediate term rebound in a still bearish long term trend.

Markets Price to Moving Average Snapshot


Generalized short term rebounds with most indexes below medium and long term moving averages.

Silver's Moving


Silver has started moving within a rising channel since July, after a two-month correction.

The 61.8% Fib retracement of the May - July correction (around 43) is now challenged and if broken opens the way for a test of the May highs (around 50) and perhaps for new highs later on.

US Philly FED Survey in Recession Area


CRB Index Touching Support


As discussed in a previous post in the beginning of May, the commodity CRB Index started a correction following three failed tests at the 61.8% Fibonacci retracement of the 2008 - 2009 plunge. The target of the correction was the 320 area which has been met recently as can be noticed in the updated daily chart above. The index strongly bounced from the 320 area right on the monthly cycle.

The updated weekly chart below shows that 300 - 320 could prove strong support due to the monthly rising uptrend line (now just above 300) connecting the 2009 and 2010 lows. Any break below 300 could send the index to 250 or even lower, while holding above 300 and turning higher could set the stage for a new test of the April - May 370 area. Trading wise, aggressive traders could go long due to the good risk/reward at this point. However, we should be aware that both daily and weekly charts are still in downtrends.

30-year Low in US University of Michigan Consumer Confidence


..a reaction to the last two weeks markets volatility that may send US GDP growth in recession area.

US Treasury Bond Yields Leading World Equity Markets Lower


As noted here, here and here, the US 10-year treasury bond yield trends are leading the trends in other asset classes. Last week we had a good example of how US bonds are "leading" the equity markets around the world.The 2.90 US 10-year Treasury bond yield support level, well discussed in the mentioned posts, eventually gave way and started the plunge on Friday July 29th, as noticed in the updated chart below:On Monday August 1st, German DAX dropped through key support (6-month uptrend line and 200 SMA), see chart below:Tuesday August 2nd was the day when key support levels were broken in many equity markets including the US S&P500 Index (levels discussed here, see updated chart below),the Romanian BETXT Index (levels discussed here, see updated chart below),and the Dow Jones World Stock Index (levels discussed here, see updated chart below).[...]

US Macro Downturn Charts


Markets Price to Moving Average Snapshot


The summer rally ended in a red sea.

EURRON Range-Trading Time


The EURRON reversal anticipated in a previous post happened as discussed, reaching each of the mentioned targets (4.15 and 4.19 - see the updated chart above) and then breaking higher in an impulsive move that took the rate to the 61.8% Fib retracement area around 4.23 and spiking towards the rarefied area bordered by 78.6% retracement around 4.2750.

The 4.23 - 4.275 area is a strong resistance that could propel the rate back to 4.33 if breached. A break below 4.19 area could send the rate back to 4.15 and towards this year lows around 4.06. The 4.19 - 4.23 in-between area is no man's land and a potential boring range. However, as long as EURRON stays below 4.23, the odds tilt towards resumption of downtrend by breaking below 4.19 later on.