I thought that a quick update is appropriate post FOMC meeting. Just as expected, Federal Reserve has engaged into QE4 or as some call it extension of QE infinity. Regardless of what name you brand the "money printing" programs, more importantly here are the details:
- Fed to buy $45 billion a month of Treasury from January 2013
- Fed links 0.25% rates to 6.5% unemployment and 2.5% inflation
- Fed will continue to buy $40 billion a month of MBS
- Fed's Operation Twist program comes to an end in December
- Fed's annualised purchases to reach $1.02 trillion per annum
Watch the summary of Ben Bernanke explaining the change in Fed policy with all the important details.
My personal perspective is that this is nothing new to the markets from the short term. It has been telegraphed well in advance and various assets had the time to adjust and discount the up-and-coming program (to a certain degree). Majority of the risk assets like stocks and commodities put in late reversals and sold off their earlier gains. Not something you'd expect on such "favourable" news. While one day does not make a trend, let us see the broad macro picture for all major asset classes:
Source: StockCharts
With the Fed pledging Treasury purchases, the 30 Year Long Bond seems to be selling off right now. Let us remember that previous occasions where Fed engaged into Treasury purchases almost always pushed down Bond prices and pushed up interest rates. While many have opted to short Treasuries, I am personally not taking this trade just yet. While Bonds are extremely overvalued on historical basis, I believe the up-and-coming recessionary conditions in 2013/14 will be even worse for the stock market.
Source: StockCharts
S&P 500 has rallied from 1340s in middle of November all the way to 1430s - a move of 7% or so - which has nothing to do with Fiscal Cliff and just about everything to do with money printing. I know bulls aren't really paying any attention, but it is important to state the fact that S&P 500 has still not exceeded its QE3 announcement highs at 1465 in middle of September. More and more "favourable" news is coming at us, such as QE3 followed by QE4, and yet the market refuses to give us an overall net gain. If this was 2010, a back-to-back QE announcement would have moved the markets in a rapid fashion.
Source: StockCharts
I have to admit, despite being heavily long PMs, the same is true for Gold and the rest of the sector. Gold, Silver and Platinum experienced an initial rally followed by a big negative reversal as well. I do not want to judge the trend by one days action, but Gold bugs have received everything they wanted, plus more. Trillions of dollars will be printed into 2013 and beyond, yet the overall sector is not really excited about it. Disappointing price action is most likely linked to large amount of PMs stale longs via COT reports. I remain long and personally wouldn't short this sector. Furthermore, I do admit that Gold Miners look oversold right now. However, one would have thought that a back-to-back QE3 and QE4 would have ignited PMs towards new highs. Therefore, I remain cautious.
Source: StockCharts
Finally, just as described in the previous article, the Dollar seems to be stuck between a rock and a hard place. All central banks continue to pledge some type of stimulus, be it BoJ or RBA or PBoC, so the currency market is in a war right now. One CB stimulates, while another stimulates more, so currencies just whipsaw up and down. From a technical point of view, one could make an assumption that the Dollar has lost its uptrend momentum, but personally I do not like to guess future prices via a few squiggly lines on the chart.
All in all, investors should pay attention to the post QE price action over the coming days and weeks, to see how the current "favourable" news impacts the markets.
All in all, investors should pay attention to the post QE price action over the coming days and weeks, to see how the current "favourable" news impacts the markets.
I wonder how do one remain cautious towards an asset? Does one stop buying it and wait and see? Does one get his finger on the sell button and be ready to press once negative developments occur? It is so hard "remaining cautious" :)
ReplyDeleteHi tiho.
ReplyDeleteAbout soft commodities.I have a question, what do you think would be the impact of a decrease in the SP and the economy. From my point of view this would be a negative also for softs. Although they have many positive points, i would like to know your thoughts on this.
What data do you use for de A/D. $NYAD in the Stockcharts? This chart shouldn't start at certain level, and afterwards increase or decresase from this level to find divergences ? In freestockcharts (T2100). A/D line is at highs again....
Thanks !
Hi, Tiho, do you think somentihing change our scenario for the markets with more QE for 2013? Thanks. Antonio Pérez Algás
ReplyDeleteAnonymous - I believe PMs remains in a long term bull market and if my belief is correct, the only thing one should do in a bull market is to be bullish or neutral - not bearish. When one turns neutral or cautious as I called it, one does not buy into the asset at present time, and waits for a consolidation or correction to play out. If enough market participants turn bearish and sentiment sours, it will be the time to turn bullish once more.
ReplyDeleteWill - it is hard to say because correlations change from time to time, so we could see stocks and softs go down together or go up together or any combination of two. A better way of looking at it is to gauge the fundamentals for each asset class... but here I am talking about long term fundamentals looking years out. The way I have done my research, if I am right, I think Softs conditions will be very favourable while stocks will struggle.
Antonio - hi Antonio good to hear from you. I think when market participants realise that more QE does not work, it could spell trouble for stocks. At that point in time the stock market could crash in 2013. We will see what happens. Bulls think the more they print the higher the prices will go, but we now have QE3 and QE4 and S&P is now higher than in March of 2012. I think upside is limited and I remain short cyclical sectors of the US stock market.
Thanks Thio, you know my target for the Industrials, at least 9.000, but I was seeinf charts of the Dow of 1.967 -45 cycle years, John Hampson referred it too, and mattches with his solar cycle- and is correlationated at 90% and this confuses me. It shows that after a drop from jan13 until march13, we will see new highs in 2013.
DeleteWhat is your opinion?
Tiho just like you predicted QE3 and QE4 was already priced into the market because as you say the stock market is a discount mechanism. The gold bugs who made 100% bets on gold are confused (and screaming manipulation) because gold reacted rather poorly. They refuse to see that gold is still consolidating the Euro crisis rally of 2011 - all stocks do this. As soon as they get bearish and all these newsletter subscriber's lose their clients then gold will rally.
ReplyDeleteAlso what do you make of sugar's weakness. As I understand Brazil continues to dump their sugar crop on the futures market. Do you see a point this will stop?
ctrader, you are a smart man. it is not the fact that QE is not work, it is actually the fact that QE has been discounted to a certain degree in recent times. Let us not forget that Silver is up 20% plus for the year. So, just like you said, we wait for weak hands to give up before we buy.
DeleteRegarding Sugar, yes it is weak right now, but there is amazing value there. When investing long term, it is not about what happens today or tomorrow, it is even not about what happened few weeks ago or next few weeks, it is about what will happen in 2013, 2014 and 2015. At least, that is the way I do it, as I am not a trader. So patience is the key!
@Tiho,
Deletecould you pls. comment on the fundamentals you see in sugar?. What are the facts you base your reasoning?.
Best. Santiago
@Tiho,
ReplyDeletesurely you already saw it, but related to sugar
http://soberlook.com/2012/12/brazil-flooding-world-with-cheap-sugar.html
"I don't think anyone anticipated such a big swing at the tail end of the harvest," said Newedge analyst Michael McDougall. He said the greater supplies from Brazil are bearish for futures prices.
Santiago
I disagree with that and I am glad to see many bears on Sugar. As for what I see, it would take too long to write it here. Your job should be to do your own research in any asset you would like to buy or sell. Do not listen to what bloggers like me say.
DeleteThe market has taken QE4 in a bad way. It seems the market thinks Fed is starting to tighten policy despite actually increasing purchases of securities. Let me explain... you see rates were going to stay at 0.25% for at least a couple of years until 2015, but now rates are linked to unemployment and inflation, so if unemployment rate falls towards 6.5% over the next 9 to 15 months, the market is speculating that the Fed will end its program. That would be a lot sooner tightening than 2015 pledge we have had so far. The initial reaction is to sell the "bad outcome" in the PMs sector and the overly bullish COT positions by hedge funds could now be shaken.
ReplyDeleteI concur.That's why I think the really bullish period for PMs will come once the current recession starts to push unemployment higher(it might be roughly 3 months from now),thus providing the excuse for further money printing.That would also be consistent with the fact that the long term correlation between gold and stocks is actually negative,despite what many risk-on/risk-off cultists claim.I shall write a more in depth comment in a few hours.A last note:Kermits are not jumping yet,but there are signs that they're champing at the bit!
DeleteI see the Fed is tiptoeing into the water of the Rubicon as Bernanke is being praised to be innovative. He will be bold. The master planner is the buyer and the floor to the market. I will not get in his way.
ReplyDeleteso which asset class will benefit the most from more printing?
Stocks--The average joe Sixapck gave up already because they can't stand the image in their rear view mirror...while the remaining players are fully hedged to the future recession (2013/4??) called by everybody and their cousins. How do I know ? because there are tons of delicious fear premiums built into (as much as 50%) buffered Structured Notes I've picked up lately. You know. The Market tends to do the best in the environment of fear and unloved. SPX 999 may not come before we see SPX 1,550.
PMs--PM bulls are expecting a parabolic melt-up coming to town. Good luck!
Im a PMs bull, but I do not expect a parabolic right now. I don't follow the sun cycles or the time cycles or the Elliot wave cycles. I think there are too many bulls via COT in PMs sector. I have been one of the few telling other PMs bulls that they will be disappointments in the near future and so far it seems that has been the case. Personally I have not purchased PMs seen July, when you famously stated that it's best to "let PM rest as they are tired soldiers". Of course afterwards, Silver exploded from $28 to $35. Today, we still have too many bulls. If they panic sell the metals lower, I personally want to buy more.
ReplyDeleteOn the other hand... Would I follow your advice and buy stocks? Not right now, not for me. I think stocks are a toast. This "floor" you speak of was last seen 1040 area as VIX spiked. Today there is no floors, only roofs. But you already know my view and positions, so you tell us what you are positioning in and where you have gone long in the stock market, for all to see.
I have placed numerous bets (via Structured Notes) that the SPX is at least 50% of the current level...10 years to 20 years out in the future. I collect anywhere from 0% to 12% interest while waiting.
DeleteNice article Tiho. Once we get through the holiday period and Q4 earnings through, the true extent of the macro deterioration should begin to sink in.
ReplyDeleteEdwin - Just like you, I too want to buy equities eventually, with a view that within the next 10 to 20 years out in the future, they will appreciate. I think eventually a new secular bull market is coming without a doubt, especially since stocks have not performed well over the last 12 years.
ReplyDeleteHowever, would I make that bet today? No, not me.
S&P 500 is too high for me right now, as I expect one more down leg, prior to making a long term investment. I have explained clearly that my view is to see One More Bear Market. Nothing has changed for me over the last few months, since I've started shorting equities. As a matter of fact, I grow more and more certain everyday that we have either topped already or we are in a topping process. In my opinion, it will soon become plain and obvious to see for all that Fed cannot push prices higher, and easing like QE3 and QE4 has been discounted by the market.
From the wisdom and experience I have collected in past years of doing this job, I personally do not buy stocks or take long term bets on them when earnings are at record highs (like today). The market needs to clear itself, earnings need to fall, margins need to mean revert and prices need to discount all of the up-and-coming bad fundamental conditions. That is when one should buy stocks and personally that is when I would start turning bullish. Now, if S&P drops from the current levels by 30 to 40 percent, which would mean prices of approximately 850 to 1000, I would definitely not be bearish anymore.
Poly - thank you so much. Can I ask what is your current view on the market? Do you also still expect new highs for S&P 500 in 2013 and higher PMs / commodity prices like the other cycle guys (Doc, Gary etc)?
Hi Tiho, I'd like to know how do you think of it: http://www.thereformedbroker.com/2012/12/13/the-dumbest-thing-youll-hear-all-day/
ReplyDeletethe market just not react yet?
thanks :)
I was reading the other post and I don't know why anyone thinks Gary is an above average forecaster. He promised Gold would be 1900 and HUI near 600 by Sept. Then in Sept he promised Gold would be 1900 and HUI would be near 600 by Sept. Now he is blocking members from posting who question his trades and inflated portfolio returns that he won't update. His members are trapped in highly leveraged trades/options with shrinking time premium. He often gets lucky with entries (maybe it is skill) but his risk management is terrible and his service is not for novice investors. People would be better off to buy and hold.
ReplyDeleteHis posts are ridiculous looking back now. This week his new blog posting says that gold miners are waiting for nat gas to bottom. Last report, miners will form a massive rally now that SPX bottomed. The report before that miners will now rally because gold has bottomed. And during all three of those report miners continued to sell off. Maybe his calls were correct but these miners were a absolutely terrible choice to play the move and then to have his subscribers leverage up with options is crazy. I can't say he is a great trader and if it wasn't for subscriptions he probably wouldn't be profitable - at least I'm not. And let's not forget that 2012 is going to go down as the worst year in history line. Sorry to vent I'm just so frustrated with him and correct what you said.
DeleteAlso for the record the only trade that is not underwater currently is the Leaps on Silver that he basically copied from Tiho. Tiho deserves the credit for that call and this why I started to read Tiho.
Apparently Gary called the exact bottom in Nat Gas according to that post. Funny enough in April I asked him why not invest in natagas since it was so beaten down. He told me that the miners would outperform. Since then nat gas is up over 100% and miners are down 15%. Had he even taken a small position his subscribers would have offset some of their heavy losses in the mining stocks. He means well and is a true gold bug but he is not a great market timer as he keeps trying to catch a falling knife with the miners that have been in a downtrend since 2011.
DeleteThank your for your article Tiho! Two-three weeks ago i had the same kind of thinking like you about "fiscal cliff" is a total non-event and all even potential negative will be discounted in case of very loud "cliff voice" of mass-media.
ReplyDeleteBut now i am beginning to doubt, becase market optimism increased from November lows and it is very suspicious. At the moment i don` t seehedjing activity at all - there is no option volatility rising, no implied correlation rising, no put-call ratio rising, no big volume in inverse etf etc etc, cds spreads at low level. THere is no much worry and no insurance.
So any seloff can unfold to the fast whaterfall.
It seems the situation is something similar to July 2011 when we had the rebound during the debt celling talks. What do you think about it?
In additional, if fast and deep correction appears it will be more likely not the beginning of the new cyclical bear, but just the correction and our old cyclical bull (in secular bear context) can be prolonged.
From Peter...
ReplyDeletehttp://peterlbrandt.com/chart-of-the-day-weekly-hs-pattern-in-yen/
He's a classical chartist.
Good luck with your trade Tiho...
Mitch
Anyone following Japan? Nikkei looks awfully enticing here.
ReplyDeleteAgree 100% The monthly indicators show that BRICs reached a major turning point a couple weeks ago and will continue to explode higher over the next 3 months. It hasn't looked this good for Japan in 10 years on a relative basis... the monthly indicators are hooking from major extremes! And better yet, you are the first person that I've seen on the blog talking about it... which means the train is still fairly empty.
DeleteI never thought I would say this about 2013, but it actually might be a fairly bullish start of the year. USD is breaking down, bond yields have plenty of room to move up, commodities and miners should have a major turning point in the next couple months. The BRIC countries are in major breakout rally mode. All systems go.
ReplyDeletePretty much agree....I know Tiho has a long-term view and is long commodities. The question is how do US sectors perform? They probably underperform but the S&P could get dragged higher.
DeleteUS is overvalued relative to the BRICs so the US indexes are not where I am be putting my money at this time. Bond Yields is about the only exposure I have to the US at this time, and will add Commodities and Miners when the major turning point occurs.
DeleteI agree that US indices are very overvalued too!
DeleteJust a few quick notes:
ReplyDeletehttp://snalaska.com/cot/current/charts/SB.png might signal that it's time to increase my sugar exposure.It's not only the aggregate numbers that are interesting(with commercials almost net long,something last seen at the end of 2011,just before a 15% and more importantly during most of 2007,at the end of a cyclical bear phase which then gave birth to a powerful leg in the secular bull market),but also the fact that Kermits now command a record short position of more than 20.000 contracts(something last seen in May 2012).
PMs appear to have cleared at least some of the excessivly bullish sentiment,but without reaching the opposite bearish extreme,so I would guess that we remain stuck in a trading range until Q1/Q2 2013,when the Fed is likely to engage in further easing to "help" a deteriorating economy.This whipsawing action might prove incredibly beneficial in further clearing the market from weak hands,either via boredom or actual losses.It should be noted however that the true muppets always like to "get some leverage" by investing in the perennially underperforming miners and hence should not constitute a concern for the prudent speculator,since they do not have any actual impact on the gold market.
Data out of Europe further confirm the recession,whilst the uptick in China is largely due to interventionist measures designed to please the masses at a delicate moment(leadership change)and hence further deteriorates the fundamental picture by wasting scarce capital.We might see further short-term gains in equities or we might not,but what's important is that the topping process is now well underway and destined to end in tears fairly soon(Q1/Q2 2013).Eurodollar CoT readings from 2011 confirm this assumption.
Sentiment and positioning on the Yen continues to remain extreme,thus increasing the likelihood that a very powerful bullish trend is in the making.People have jumped to conclusions re Abe and the BoJ without properly thinking things through and the reckoning is not far away(it might even start on Monday in case of an unexpected election result).The same herd behaviour can be noticed in bubble currencies and I have also read more than a few articles "thoughtfully" explaining why "it's different this time" in australia re the property bubble.
Just for the record - a different view on yen:
Deletehttp://www.merkfunds.com/merk-perspective/insights/2012-11-28.html
Tiho, congratulations for your blog. You've done a great job !
PAT
Thank you for the article.A few comments off the cuff:
Delete1.The reader obviously has a seriously flawed understanding of macroeconomic theory.It is obvious he is not familiar with the works of Mises and Rothbard.This is a major red flag:if one does not have the proper tools for interpreting reality,then the risk of misinterpreting it is high.
2.It's the seasonally adjusted current account that went negative,not the actual current account(this is noted at the margin of his chart).
Please take a look here to see the actual state of the current account: http://www.tradingeconomics.com/charts/japan-current-account.png?s=jnbpab&d1=20080101&d2=20121231
These will help you in putting things into perspective:http://www.tradingeconomics.com/charts/japan-current-account.png?s=jnbpab&d1=19850101&d2=20121231
http://www.tradingeconomics.com/charts/japan-current-account-to-gdp.png?s=jpnca2gdp&d1=19800101&d2=20121231
It is clear that we're approaching the end of the party,but we're quite not yet there.It is my contention that to get there we'll need "one more bear market" as Tiho would say.
3.Speaking of bear markets,panic selling and liquidation of overseas investments and subsequent repatriation of massive amounts of Yens is what will push its value higher.This is precisely what happend after the earthquake the author mentions and of course what happend in a grand fashion during 2008. Given that the Japanese are incredibly rich(thanks in part to the "evil" deflation),they currently hold massive amounts of money and other assets overseas,to the tune of 55% of GDP(which although it's a useless statistic per se can help in giving a sense of proportion when used as a denominator in such ratios).
4.Of course secular bull markets do not die of a quiet death and not when every bloke is procaiming high and loud that it has ended(using "common" out-of-context justifications like the current account deficit the author mentions).