Thursday, April 21, 2011

Gold ETF Money Flow

Money is once again flowing very strongly into Gold. This indicates, in the short term, that majority of retail investors are once again herding towards an uptrend. Usually, these types of events do not present smart buying opportunities. Daily Sentiment Index (DSI) currently stands at 95% bulls on Gold and 97% bulls on Silver. There is extreme euphoria in the precious metals environment at present, so a correction should follow very shortly.

Latest Investor Sentiment Update

Individual Investors
The chart above shows the spread between bullish and bearish US retail investors, when it comes to future US equities outlook. As we can see, currently there are more bulls than bears, but the readings are more neutral than anything else.

Financial Advisors
The chart above shows the spread between bullish and bearish financial advisors also known as newsletter writers. When we comes to tracking the mood for this group of market participants, we can currently see that there are many more bulls than bears. The readings warn of a potential correction around the corner.

Fund Managers
The chart above shows the bullish or bearish exposure towards the US equity market, by the institutional investors, also known as fund managers. When we comes to tracking the mood for this group of market participants, we can currently see that there are many more bulls than bears. The readings are edging towards a potential correction warning area.
The chart above shows the overweight and underweight exposure towards the global equity markets, by the institutional investors, also known as fund managers. When it comes to tracking the mood for this group of market participants, we can currently see that majority of investors are heavily overweight this asset class. The readings are edging towards a potential correction warning area.

Options Traders
The chart above shows the difference between call or put exposure towards the US equity market, by the individual investors or speculators. When we comes to tracking the mood for this group of market participants, we can currently see that there are more bulls than bears, but the readings are more neutral than anything else.

Futures Traders
The chart above shows the bullish opinion of futures traders, when it comes to having exposure towards US equities. When we comes to tracking the mood for this group of market participants, we can currently see that there are many more bulls than bears. The readings warn of a potential correction around the corner.

Conclusion
I am not in the business of constantly and foolishly forecasting tops in this bull market like other bloggers. Extreme bullish sentiments on their own do not signal that anyway. Majority of investors, who try to be contrarian do not understand this rule. On the other hand, this post goes towards expressing a massage that right now might not be the best time to buy stocks. Is it a good time to sell? It is difficult to answer because every single individual has different strategies and needs. Personally, I have close out al my long and short positions within the financial markets and am now sitting on the sidelines. A great buying opportunity that was seen in July and August 2010 is now well behind us.

Tuesday, April 19, 2011

BofA Merrill Lynch Fund Manager Survey April 2011

In the April FMS, global growth expectations fell for the second consecutive month while inflation expectations remain high. But with no imminent change in Fed policy anticipated and bonds looking more risky, investors feel compelled to stay in stocks. Equity allocations rose in April despite another sharp drop in profit expectations: a net 19% see higher profits in the next 12m, down from 32% last month and 51% in Feb.
A net 51% of investors regard monetary policy as too stimulative, the highest level since July 2004, and commodity price inflation is now regarded as the largest tail risk for financial markets.
Just 6% of the panel think long-term interest rates will be lower in 12 months’ time. Liquidity expectations remain high, nonetheless, with Q1-2012 seen as the most likely date for the first Fed rate hike.
Cash balances fell to 3.7% from 4.1%. No sell-signal is triggered for equities but upside looks constrained. Risk-taking has increased: our Risk Appetite index is at 45 vs. a long-term avg of 40; levels of hedge fund gearing rose to 1.49 from 1.38.
The equity risk premium for investors continues to fall (3.79% vs. 3.86%) and supports an increase in equity allocation (net 50% O/W from 45%). The big U/W in bonds (58%) continues and cash O/W was cut to 10% from 14%. A long position in commodities was extended, rising to 24% from 21% in March.
In a growth-constrained world, investors want profit visibility and this month sees a big rotation out of Japan (to an 18% U/W from an 8% O/W) back into Emerging Markets (to a net 22% O/W from neutral in March). The US remains the most favoured region at 30% O/W while the consensus is neutral on Europe.
Energy is now the most popular sector at a net 40% O/W displacing the under performing tech sector. But the sector mood is more defensive with rotation into utilities, pharma, staples & telecom, out of discretionary, industrials and materials. Financials remain stubbornly unpopular; the net global position falling to 15% UW.
The major currency moves this month saw fairly muted changes with GEM moving further into undervalued territory and EUR going the other way. Sterling is less under-valued, while limited changes were seen in USD and Yen.

Source: BofA Merrill Lynch Newsletter

Sunday, April 17, 2011

Emerging Market Fund Flows

The charts above show Emerging Markets bond and equity fund flows in both cumulative format as well as regional allocations.

Source: Barclays Capital Newsletter

Equity Fund Flows

Emerging Market fund outflows are decelerating while Developed Market fund inflows are dropping. Are we about to do a switch again?

Source: Nomura Newsletter

Dow Jones Breadth Update

The current breadth readings for the 30 equities that represent the Dow Jones Industrial Index show a very mixed picture. For one, the only stock within the index that is currently overbought towards the extreme side is Kraft Foods. Other overbought stocks include Coca Cola and Merck. On the other hand, oversold levels (even though the aren't extreme) are currently seen in Intel, Disney and Bank of America.

Source: Bespoke

US Dollar Sentiment Update

The sentiment on the US Dollar is remaining very bearish for weeks now. The commitment of traders shows that speculators exposure towards the US Dollar stands at 220,000 contracts net short. The only currency where the speculators are long the US Dollar is with the Japanese Yen.

Finally, the Daily Sentiment Index is currently sitting on 5% bulls and 97% bulls on the European Euro. The sentiment has been this extreme for quite a while now, so it is my opinion that we are about to witness a very strong short squeeze to say the least.

Friday, April 15, 2011

Update

Apologies for the lack of updates. I am currently away on a mining explorations site in Northern Queensland. The area is famous for abundance coal. I will be back to normal posting schedule from 28th of April 2011. In the meantime, posts might be far and few between.

Global Business Cycle Update

The chart below represents the current state of the global business cycle as measured by manufacturing indices. As we all should know, readings above 50 indicate expansions, while readings below 50 indicate contractions.
United States OECD leading economic indicator tends to lead manufacturing production by about 2 months....
...while the German OECD leading economic indicator tends to lead industrial production by about 4 months.
Furthermore, the above chart shows the current state of business sentiment and consumer confidence in Germany...
...while in Japan, the Tankan Business Sentiment Survey, tends to be a good indicator of industrial production.
Chinese industrial production tends to follow New Manufacturing Orders...
...while in rest of emerging Asia (ex-Japan), PMI tends to be a good indicator of industrial production.
Similar story is occurring in Brazil...
...and Russia. Overall, the charts above should give one a great view on the current state of global economic business cycle from both developed and emerging economies. What is my view?

Majority of the manufacturing indicators look like they are reaching "toppy" levels. This doesn't have to indicate an automatic recession like some might believe, but just that the peak in growth for the cycle has already occurred. Therefore, we should expect lower growth from here in Developed Markets, but not a contraction.

Friday, April 8, 2011

Middle East & North African (MENA) Crude Oil Production

Chinese Economic Outlook

Auto sales are down considerably since early 2010...
...as loan demand growth remains decently strong, buy eases from 2009 levels...
...while M2 Growth Rate collapses, indicating a possible equity market (Shanghai Composite) bottom.

Thursday, April 7, 2011

S&P 500 Technical Outlook


Source: Nomura Newsletter

Crude Oil Puts Pressure On The Global Economy

Both Brent Crude and Nymex Crude are currently hitting their new bull market highs. Despite of the blame being passed onto speculators and/or Middle East, the honest truth is both of these explanations are just excuses. The secular, long term, generational bull market in commodities and in Crude Oil continues and as we can see from the chart above, it tends to last anywhere between 10 to 15 years. The last secular bull market lasted from 1966 until 1981, which was 15 years. The current secular bull market started in 2000 and has currently been moving and progressing quite strongly for 11 years. Crude Oil was close to $10 a barrel in late 90s, while today trades in excess of $120.
Another thing that is quite obvious is that this type of a rise in price is starting to effect the global economy. The most vulnerable parts of the world economy to an oil price shock currently stand in Emerging Asia and Central and Eastern Europe. These two sectors appear to be particularly exposed to energy price pressures. On the other hand, the developed world seems to be better positioned to weather such a scenario.

Bullish Sentiment At Extreme Levels

Investor Intelligence Survey came out last night with quite a surprising readings.
In other words, the ratios of bulls outnumbering bears now stands at 3.65 to 1. This is one of the most extreme readings in over 8 years and is worth writing about all on its own.
The market has yet to make a new high above 18th of February 2011 at 1343 and yet there are hardly any bears left, sitting at only 15%.

Wednesday, April 6, 2011

Market Update: Bulls vs. Bears

Bullish Points
· Market: 2s10s Yield Spread & 0.25% FED Funds Rate Remain Supportive Of Risk Assets
· Market: 3rd Year Presidential Cycle Means Stocks Should Deliver Strong Performance
· Market: Mutual Fund Outflows In Emerging Markets Indicate Oversold Conditions
· Market: Dow Theory Confirms Uptrend As Primary Support Holds For Risk Assets
· Market: Positive Seasonality For The Equities Should Last Until May
· Market: Advance Decline Line Making New Highs
· Market: AAII Sentiment Remains Bearish When Averaged Over The Last Month
· Economy: US Small Business Hiring Means Backbone Of The Economy Moving Again
· Economy: Real Final Sales Are Moving Quite Strongly According To Latest US GDP Report
· Economy: Unemployment Rates Still Very High Indicates Enough Worry Left To Climb
· Economy: Asian And Latin American Industrial Production Possibly Bottoming Out

Bearish Points
· Market: 100% Gain Since March 09 Only Occurred Twice Before In 100 Year History
· Market: Consensus Optimism As Bankers Increase Year End S&P 500 Targets
· Market: Long Term Valuations Are Extreme (CAPE10, Q Ratio, Market Cap To GDP)
· Market: US Dollar Sentiment Is Extremely Bearish And Could Signal Risk Off Rally
· Market: II Sentiment Still Extremely Bullish By All Measurement Standards
· Market: 52 Week Highs Divergence, Summation Index Divergence, Bullish Percentage Index Divergence, Stocks Above 50MA Divergence All Means A Weak And Narrow Breadth
· Market: NYSE Margin Debt Has Increased By 80% Since March 09 Lows And Approaching 2000 and 2007 Levels
· Market: Inflation Trade Is Overdone As Majority Still Buying TIPS Over Treasuries
· Market: Short Interest On US Equities Hits Lowest Levels Since 2007
· Market: Defensive Sectors And Energy Outperforming Means We Are Already Late In The Cycle
· Market: High Yield Junk Bonds Extremely Overbought As Inflows For Jan & Feb Match Over Half Of Inflows For 2010
· Market: CRB Index Sentiment Is Extremely Bullish
· Market: Crude Oil Putting Pressure On The Stock Market As Positive Correlation Breaks Down
· Market: We Still Have 90% Of Stocks In S&P 500 Trading Above 200MA Indicating Overbought Levels
· Economy: German Business Confidence IFO At Record Levels
· Economy: FEDs QE2 Coming To An End
· Economy: US Small Business Optimism Highest Since March 09
· Economy: ECRI Diverging With The Stock Market
· Economy: Gross Profit Margins Sitting Close To Record Highs Indicates Minimal Wall Of Worry To Climb
· Economy: US Earnings Hitting Close To All Time Highs Indicates Minimal Wall Of Worry To Climb
· Economy: US Regional Manufacturing Survey Prices Paid Index And New Orders Index Indicate That ISM Is Rolling Over
· Economy: Global PMI News Orders Dropped First Time Since September 2010 Indicating A Slowdown
· Economy: Chinese PMI Still In A Slowdown Mode As Interest Rate Hikes Could Cool Demand For Commodities

Conclusion: I know, I know... lot more bearish points than bullish points. We could be slowly getting closer and closer to a medium term top of some sort and possibly should lighten up on positions, as a 10% to 20% correction could be around the corner. It might even be worse, however, over the long term I still remain bullish on risk assets, because "The Bernank" will print again in form of a QE 3. That will be good for risk assets and very bad for the 30 year Treasury bull market, as well as the US Dollar.

Sunday, April 3, 2011

Quote Of The Day

“Empty your mind, be formless, shapeless – like water. Now you put water into a cup, it becomes the cup, you put water into a bottle, it becomes the bottle, you put it in a teapot, it becomes the teapot. Now water can flow or it can crash. Be water, my friend.” – Bruce Lee

“If you always put limits on everything you do, physical or anything else, it will spread into your work and into your life. There are no limits. There are only plateaus, and you must not stay there, you must go beyond them.” – Bruce Lee

Sorry for the lack of updates. I'm currently away from my normal work environment.