Update: Several Changes To The Blog

There are some changes to the blog early this year. What I will be doing is posting in a slightly different manner. Posting will not be done just for the sake of posting information and filling up space on the blog. Instead, majority of themes and thinking processes will be posted prior to and during certain inflection points or underlying market trend changes. Therefore, those who follow the blog, can see calls, decisions and investments being made win real time. Examples of these major themes and thinking processes are below:

• Turning bullish on Equities (Part I & Part II)
• Upcoming pullback for risk assets (Part I & Part II)
• Turning bearish on Treasuries (Article)
• Buying of Agriculture (Article)
• Buying of Silver (Article)
• Turning bearish on US Dollar (Part I & Part II)
• Buying of Swiss Francs (Article)

If I just covered those major themes over the last few months, majority of the confusion would also be removed from ones thinking process. Personally, my view was to turn bullish on stocks relative to bonds in late September 2011, followed by constant monitoring of Credit Markets. Afterwards, I turned bearish on Treasuries and started investing majority of cash into Commodities closer to the years end. Finally, I recently turned bearish on the US Dollar and started buying currencies against it.

To post charts and articles in-between, just for the sake of filling up the blog, can and will create confusion at times. The old saying is that sometimes it's simply better to say nothing instead of being forced to say something. Having said that, I will try and focus on a major asset class once a week, where I cover equities one week and currencies the next and commodities the week after. Obviously, some weeks when there is nothing to say, I will not post. Major themes that will be covered on the blog still remain:

• Stocks
• Bonds
• Commodities
• Currencies
• Credit
• Economy
• Portfolio Updates

Finally, from now on, instead of doing Weekly Recaps, the blog will feature Monthly Recaps instead, which should be more in-depth in regards to both market movements as well as portfolio performance. I hope you enjoy the new blog feel, which should create much more clarity when it comes to financial market directions.

As always, feedback is very welcome! ~ Tiho

Portfolio Upate: Buying S&P Puts

When I restarted the Portfolio Performance page due to recently opening up a new fund in HK, I said that I will mainly update the blog about funds movement and performance and not focus on trades anymore. Keeping that in mind, every once in awhile I will also update the blog on a few trades I take too, but I will not bother keeping the performance score on these (it takes too much time). So lets get into it...

I have recently purchased some OTM (out of the money) Puts on the S&P 500. Just a quick note, these trades have nothing to do with the fund, but my own personal trading account. Why did I buy some Puts on the US equity market? First of all, my view since a week or two ago has been that the equity markets are now overdue for a correction or a consolidation (Article: Possibility Of A Correction Approaching - Part I). In that article I also showed that Call buying by the Dumb Money has been quite high. Majority of the time, you are always better off doing the opposite when you see a huge Call binge.

Fast forward to today and now we have even more Calls being bought by dumb money, while at the same time smart money is running into Puts to protect their gains since October 04th bottom on the S&P 500 at 1075. As we can see from the chart above, the options activity is leaning towards a correction and while optimism is not as extreme as it could get over a 21 day reading (one trading month), it is definitely becoming so over a 5 day or 10 day average.

On top of that, the Volatility Index has now broken down below 20, making OTM Puts much cheaper than in November or December of last year. Therefore, a risk to reward is pretty decent on a trade like this, where it wasn't so only a couple of months ago. Furthermore, the VIX has now broken down below 2 standard deviations of 20 days, which tends to signal an oversold condition for the index and a potential pop. The options I own will not expire for the next few weeks, so I got plenty of time to wait for a pullback. I guess we will see soon enough...

Currencies: Dollar Rally Ending - Part II

Last week we covered Equities outlook, mainly focusing on S&P 500 from both short term and medium / long term. This week I have been following up on Currencies outlook in a two part post. The first part was posted at the start of the week (Article: Dollar Rally Ending - Part I), while the second will be posted today.

Introduction

The first part of the currencies post was mainly focused on easing of financial conditions in the Eurozone, which should remove any systematic risk in the banking sector for the time being, and with it also withdraw strong Dollar financing demand. On top of that, we can also concluded that the current US Dollar Index rally, mainly against the Euro and the Pound, is not confirmed globally in a broad Currency Board measure. It is also not confirmed by looking at simple technicals where the US Dollar is failing to make new highs against almost every currency apart from a few European ones. After looking at the price action this week, we can conclude that the Dollar ended up being even weaker, than when the first post was written on Monday.

Sentiment

The Trade Weighted Dollar Index has been moving up gradually during another saga of European problems. As I scout around the blog-sphere, almost every single investor is bullish on the US Dollar. It is amazing how much the mood has changed since May of last year. This is usually a signal of an up and coming top. It seems that a lot of investors are making the same old mistake - they are staring right at the DXY Dollar Index and saying that it has more room to move higher. Meanwhile, the Dollar itself is starting to fall hard against a large number of global currencies - refer to the first post (Article: Dollar Rally Ending - Part I).

It seems that global investors away from the Western countries are not behaving as stupidly as they were in 2008, when the Lehman Crisis made them all flee into the US Dollar. Reason I say "stupidly" is because the US Dollar is far far away from a safe haven. Having said that, every crisis since than has resulted in a smaller and smaller Dollar rally during the short squeeze. Fast forward to today, and I actually cannot believe how optimistic investors are on the Dollar, even though it is only a several percentage points away from the early 2008 panic low. In other words, we barley made any ground on the upside and yet every man and his dog are US Dollar bulls. This is a perfect "slope of hope" recipe for the Dollar to slide lower with optimism remaining high. So why is this happening?

Well it has a lot to do with the Euro, that is "out-smarting" investors perceptions. Currency investors seem to be "mesmerised" by European problems, that they have forgotten what they are getting themselves into. Since currencies are a relative asset class, unlike equities, when an investors sells the Euro, he is usually forced to buy the Dollar (these two currencies have most globe liquidity). The only problem with being a Euro bear is that the Dollar is even worse both fundamentally and technically - and yet we currently have historical record net short positions on the Euro.

Investor keep asking themselves: "how come the Euro is not lower with all these problems around?" The answer is simple: more and more investors are moving away from the US Dollar safe have and its allure of a reserve currency (which won't last forever); and are fleeing into other assets that hold value and protect purchasing power better than Federal Reserve paper. Real assets like real estate, precious metals, raw materials and even equities are adjusting to the upside as central banks print, print and print some more.

Moving back to the topic of timing the currency markets, we can see that the US Dollar optimism according to SentimenTrader's cumulative group of survey's is rather extreme. Historically, when optimists outnumber pessimists by 70% or more, the US Dollar is close to putting in a top. This is especially true if we get more than one reading in close time proximity, where the second reading comes right after the first like in late 2008, middle of 2010 and today.

On top of that, one asset class indicator is not enough. We need to see this type of consensus outlook and universal bullishness on the Dollar match with similar strength of pessimism on the Euro, Pound and some other currencies. While I already covered the Swiss Franc record bearish opinion few days ago, the above chart shows us that when the Euro optimists fall below 30%, the Euro almost always tends to put in a proper intermediate term bottom. One smart way of using sentiment is to make sure Commitment of Traders positions confirm the outlook of Public Opinion. Today's conditions definitely do, as Euro is the most hated asset right now.

Summary

Fundamentally, the Dollar is an awful currency. We are currently in a secular long term bear market, where this terribly flawed currency will eventually loose its reverse status. It is not a straight road down the hill and there will be major Dollar rallies along the way, but one of the main themes is to stay constantly bearish on the Dollar. When others are bearish with you, resist shorting the Dollar and even buy some calls on it, but when others are bullish on the currency like they are today, it is definitely time to open some shorts or add to your existing short positions.

As of this weeks price action, the Dollar strength is not broad anymore, while sentiment and technicals imply bearish outcomes lay ahead. Going long the Euro as a contrarian right around these levels might look like a smart move (maybe wait for a short term pullback or a retest of $1.26 level), but the Euro itself is also a sick currency. The same is true with the British Pound as well, so it is best to stay away from these three ugly sisters. Therefore, investors should short the US Dollar with other currencies that have better fundamentals, including the Swiss Franc, Australian Dollar, Korean Won, Canadian Dollar, Singapore Dollar, Norwegian Krone or Swedish Krona.

As a side note, there are now too many investors betting on further appreciation of the Japanese Yen, so i would be extra careful buying its heavily overvalued currency right around these levels as of today. That is not to say that the Yen cannot gain even more, but it is just a caution.

Portfolio Upate: Long Swiss Franc

Portfolio Update

Before I get into the Swiss Franc post, I would like to update the funds performance as well as short term issues we have been constantly emailed about. Majority of the funds cash in now deployed in investments, which means the opposite of majority of 2011. As the NAV grows due to expended partner inflows, we will be looking at allocating more cash towards sound investments, but for the time being the fund holds Agriculture (RJA), Physical Silver (PSLV) (where we have added slightly to our position) and the new addition Swiss Franc (FXF).

The funds performance [updated as of 21st of Jan 2012] has been quite volatile to start of with. It is due to our slightly leveraged position of Physical Silver Trust (PSLV). There has been a huge rally as we bought at the recent intermediate bottom. That sent the funds overall performance to a high return. However, we understood that Mr Sprott was planning to do a second offering and reduce the premium, which meant that the Trust price was overvalued has not yet found equilibrium.

We have received many many emails warning us of this issue and we appreciate that very much so. Nonetheless, this issue does not concern us as we are not traders with short term perspectives. As we are expecting the ratio of Gold to Silver to come back to its historical norm of 16 to 1, we also understand that the current true value of Silver is around $100 as Gold trades around $1,600. Therefore a premium of 15% does not really concern us much.

We are much much more worried about being invested into "real" Silver vehicle that has liquidity of a stock. On top of that, as opposed to Comex "paper" Silver, which has about 5% physical backing, we rather own something that is actually stored in a vault in Canada. In the long run we can expect geopolitical problems in Middle East, European Sovereign Defaults and ongoing global currency debasement; so an investor has to make sure the asset bought will actually do what is expected.

Long Swiss Franc

We don't like currencies in general, as we think Western countries are in the process of ongoing debasement to ease the debt burdens on societies. When we look at the global currency picture, we definitely do not like the US Dollar first and foremost, followed by other sick major currencies like British Pound, Japanese Yen and the European Euro. And while we are currently contrarian bullish on the Euro, as everyone falls in love with the US Dollar, an even better currency we do like right now is the Swiss Franc.

Swiss Franc is currently pegged to the Euro by the order of the Swiss National Bank. Therefore, the current correction in the Franc, which has been a major one in this secular bull market against the US Dollar, has been manifested in part due to a central bank decision. Now, if you are a keen student of financial history, you would have learned that central banks almost always tend to be wrong in their decisions to stem currency appreciations and maintain pegs, so we are prepared to take a bet that the current one will also end up being a total disaster. So why did we buy the Franc now, as opposed to before?

Well first of all, we are super bearish on the US Dollar right now. From a contrarian point of view, we can see that investors hold record net shorts on the Euro as of last Friday. Since the Franc is pegged to the Euro, a rise in the Euro will also mean an equal or slightly better rise in the Swiss Franc. So in other words, the Swiss Franc should do at least as well as the Euro does, but possibility much better, because Safe Haven currencies like the Franc tend to thrive in ZIRP environment.

On top of that, there are now shorts on the Swiss Franc futures contracts as well. We think that the current Dollar rally is almost complete, similar to what we saw in 2008 and 2010 spikes. Therefore, the current fall in the Franc, while speculators remain net short, is a great buying opportunity and a great investment.

After a dramatic fall since early August, there isn't a bull in sight when it comes to the Swiss Franc using the Public Opinion. To be quite honest, the sentiment on the Franc is now as low as we have seen it since at least 2005 - and one of the lowest in a decade. As a matter of fact, the Public Opinion on the Euro and the Pound is at a multi year lows too, which is also a great confirming signal that the Dollar rally is due to end very very shortly (more on that later in the week in Part II of the currency post).

Furthermore, I found it very interesting to see a huge Short Interest Ratio on the Swiss Franc ETF (FXF). Ever since the Franc topped in August, investors have gone mad with shorting the currency as if it is going to be a sure bet all the way down to zero. I have a feeling that these short positions will shortly be super squeezed, just like the ones in the Euro COT report (chart above).

Summary

All in all, buying Swiss Franc is very similar to buying Silver. Essentially, it is a bet against the US Dollar - the most fundamentally flawed currency around right now. On top of that, just like Silver few weeks ago, the Franc is very much hated right now and there is above average chance of a rally around these levels. Wish us good luck!

Investment Summary

Date: 18th of January 2012

Investment: Currencies

Product: FXF ETF

Entry: USD $104.78

Percentage of NAV: 11%

Currencies: Dollar Rally Ending - Part I

Last week we covered Equities outlook, mainly focusing on S&P 500 from both short term and medium / long term. This week I will touch up on Currencies outlook in a two part post. I hope you enjoy what I have to say here, because currently this is the market I am following the most (apart from Credit), as I will be making some investments in these assets very very soon.

Back in early September, I wrote an article about the reversal of the US Dollar downtrend (Article: Is The Dollar Rally Real?). The articles focus wasn't just on the European Union Crisis and the weakness of the Euro and the Pound, but looking at the broad currency picture from Commodity Currencies to BRIC and Emerging Markets Currencies. It is a great read, so I highly recommending going back and reading it before continuing. If time is short here is the summary:

"...the current Dollar strength is actually confirmed broadly throughout the world and not just by the relative weakness of the Euro and the Pound. Therefore, this lets us know there is a much greater chance that the Dollar will now stage a short to medium term rally. Those long the Dollar should take comfort in knowing that the majority of other currencies as well as precious metals look exhausted and ready to correct."

Fast forward to today, over four months since that article was written, and what happened was exec tally that. Globally, currencies and precious metals experienced strong corrections from September to December. However, what we have now is a reverse setup in my opinion. I think that the Dollar rally is now in its last inning. Apart from short term jerks or spikes due to EU problems in coming days or weeks, it is my opinion that the Dollar is in the process of forming a top. Therefore, personally I will be looking for opportunities to short the King Dollar around these levels and here is my reason why:

Dollar Funding Stress Easing

If you've read today's Chart Of The Day post, you would have noticed a chart showing how short term financing costs in both Spain and Italy have fallen dramatically since middle of November 2011. On top of that the chart above shows European Financial Stress is now easing too. This can also been seen by looking at the Euro Dollar 3 Month Swap Rate, which is now improving significantly since late November 2011. Therefore, we can conclude that open market US Dollar demand for debt financing by banking institutions is starting to ease. If the Dollar will not be rallying due to systematic bad news, than what other reason is there for the Dollar to rally?

Dollar Rally Is Not Broad

Bob Farrell was one wise investor and his rules should always be respected, followed and executed. At least I think so. Rule number 7 this gentlemen put forward was:

7. Markets are strongest when they are broad and weakest when they narrow. This is why breadth very important. Think of it as strength in numbers. Broad momentum is hard to stop.

While breadth is mainly applied to Equity Indices like S&P 500, the theory can be used in any asset class. Personally, I do not make decisions in the currency markets based on the US Dollar Index, like so many others investors. This is suicide, as the Euro and the Pound hold majority of the weighting and the index is definitely not a good broad measure of Dollar's strength.

So I have constructed my own Currency Board, which tracks European, Commodity, BRIC, Asian and other Emerging Market currencies. It is designed to give us a feel of weather the Dollar is strong - rising against majority of the global currencies; or if the Euro is weak - Dollar rising against Euro, Pound and few other selected currencies, but falling against other majors. Remember, when the Euro falls, it is very important to know weather the Dollar is strong across the board or if the Euro is just weak.

If we look at the Currency Board above, which is updated as of Friday's close, we can see that while the US Dollar made a new weekly gain against the Euro, Pound and few other European currencies, it struggled against a lot of other important currencies, including New Zealand Dollar, Brazilian Real, Indian Rupee, Mexican Peso and Polish Zloty.

CNBC and Bloomberg were portraying S&P downgrade of France as a price melt down and yet the Dollar only gained against 9 out of 24 major currencies around the world. Furthermore, the Euro has been in a free fall over the last month or even longer, as it has closed down six straight weeks in the row. Having said that, majority of Commodity currencies, Asian currencies and GEM currencies have actually gained against the Dollar in the same time frame. Now... that is not a broad measure of strength, is it?

Another way of looking at this is from a technical perspective. You would have noticed from all the media reports that the Euro sank to a new 52 week low on Friday's bad news from the S&P downgrade. Euro Crisis is now on front pages of almost every single global newspaper in the world. So it makes sense for the US Dollar to also be making 52 week high across the board right?

The chart above shows that this type of so called "Dollar strength" is not confirmed against other currencies around the world. We can see that the Real, Ruble, Won and Peso have not confirm this move. However I could have taken any one of the following currencies and included them into the chart as well: Aussie & Kiwi Dollars, Japanese Yen, Canadian Dollar, Singapore Dollar, Taiwan Dollar, Indonesian Rupiah, Indian Rupee, Chilean Peso, Chinese Yuan, South African Rand, Turkish Lira and Polish Zloty have not confirmed the move either (and the list goes on). Don't be fooled by the US Dollar Index because... that is not a broad measure of strength, is it?

Summary

In this first part of a two part post, we can see that financial conditions in the Eurozone are easing. This might still be subject to slight change with potential turbulence over coming days or weeks, but with ECB expanding its balance sheet it is pretty safe to say that the can has been kicked down the road again. This removes systematic risk in the banking sector for awhile and with it strong Dollar demand. So what does this mean? It pretty much means that the Dollar will return back to trading on its fundamentals - a terribly flawed currency, which is even worse than the Euro.

On top of that, we can also conclude that the current US Dollar Index rally, mainly against the Euro and the Pound, from the last week as well as from the last month, is not confirmed globally in a broad Currency Board measure. It is also not confirmed by looking at simple technicals where the US Dollar is failing to make new highs against almost every currency apart from a few European ones.

All of this leads me to conclude that the Dollar rally is suspect and that the the Euro weakness is coming to an end. In part two, which will be written later in the week, we will be focusing on sentiment and investor positioning. Time to turn contrarian on all this bad news around us so stay tuned!

Chart Of The Day

Remember... we aren't on the Gold standard anymore, like we were prior to 1970s, so for the bond yields to be below 3% on the UK or US or German Long Bond today, is totally insane. Developed market government bond bubble...

Stocks: Possibility Of A Correction Approaching - Part II

Following the post I wrote regarding equities (Article: Possibility Of A Correction Approaching) on Wednesday, I received quite a few emails that were questioning my bullish outlook despite writing about a sell off. I also noticed some forums and blogs used the article as a proof that a bearish outcome in stocks is about to occur, where the Dow Jones will fall "below 10,000" in the next few months of 2012. I want to make it clear that this is definitely not my view, as all I am looking for is a pullback correction and not a major sell off. These are some of the reasons I am bullish on mainly Commodities but slightly on Equities as well, while being bearish on Government bonds and US Dollar in 2012:

1. Credit Pressure Easing

I thought it is appropriate to explain the situation a little bit better, but this time around focusing on the credit and bond markets as well as equities. Printing money does not solve problems. But it does postpone them, however. And that is precisely what the ECB has managed to achieve with its recent liquidity injection late last year through a process known as LTRO. Furthermore, let us not forget the reopening of the Swap Lines by 5 major Central Banks around the world. With Central Bank balance sheet increasing in last few months (printing of money), what has been the outcome?

Credit market pressure I have been tracking and discussing over the last few months in several posts, is now starting to ease. This is a positive outcome without a doubt. First of all, Euro Dollar 3 month swaps are starting to come in from -150 basis points all the way to -80 basis points last night. That means Dollar funding is starting to ease. Second of all, Financials Sector CDS index is topping out as the fear slowly clams. Furthermore, Euro Libor OIS readings are now starting to reverse too, which means bank trust is slowly reversing from a possible lending freeze outcome. All of these signals will most likely also push banks towards putting cash to work, instead of pilling into ECB overnight lending facility. We possibly could have already seen that last night in Europe, with successful Spanish Bond auction.

On top of that, 2 Yr Yields from Ireland, Portugal, Italy and Spain are all falling dramatically. Chart above shows that bank funding problems in the US are also falling dramatically too, according to the 2 Yr Currency Swaps. That means that the ECB has managed to create a safety net for the time being, giving one last and final chance to politicians and bureaucrats when it comes to Eurozone Debt solution.

Therefore, my view is that while Feds/ECBs balance sheet expansion (money printing) through Swap Lines & LTRO is for the purpose of buying time only, it will last for awhile and maybe into 2013. So with that in mind, my whole point is that we have another Risk On rally for at least the next 6 to 9 months. On of the first positive signals is that banking and other financial stocks are now starting to outperform the S&P 500. As you might remember from my previous posts, that is one of the surprises I see occurring in 2012.

2. Investors Are Negative On Risk

Retail investors shown by mutual fund flows in chart above, are selling stocks at the fastest pace since middle 2002 and late 2008 - both of which marked major bottoms. What a horrible mistake this will turn out to be for the next several quarters or so. Add to that hedge funds having had an awful year, losing between 4% to 8% on average in 2011. That should make us all think that these managers will be chasing some performance in 2012, as their net long exposure is now as low as early 2009.

Underinvestment due to fear, with high levels of cash which does not yield anything, seems to be the name of the game for most fund managers. Merrill Lynch Survey is showing exactly that, with managers holding large cash levels indicating lots of fire power on the sidelines to push risk assets higher.

3. Strategists Are Bearish

The consensus view, according to Bloomberg terminal data, on growth is along the lines of a weak first half of 2012 and a recovery in the second half. I disagree. My opinion, which I have held since maybe late November and December 2011 (as I started deploying cash in my portfolio), is that we will get a stronger than expected first half in pro risk assets as well as growth (minus Europe).

Lets rewind back to early 2011 when Wall Street strategists were forecasting a very very bullish rally for the year. What we got was a volatile year that pretty much shed of at least 20% from the S&P 500 peak by early October. Fast forward to early 2012, and these same "gurus" are now expecting one of the smallest ever gains for the year - in other words they are bearish. S&P 500 target mean by Wall Street is now 1,363 - which means a 5% rally from here. With strategists doing a 180 degree flip from 2011, so should we.

Bill Gross, on the other hand, who was bearish on Treasury Bonds in February 2011 at the bottom, has now increased his exposure towards 30% of his fund. After super fearful 2011, where majority of investors flocked to Governments Bonds around the world, rather than be bearish on stocks, I have a feeling that it will be much wiser to be bearish on Government bonds in 2012. That is where all the investors are sitting now due to fear and that is the most overcrowded trade. Just watch the get flushed out towards pro-risk assets in coming months...

Summary: Everyone Expecting Euro Disaster In 2012

So with all that in mind, do you really want to buy high and sell low? Expecting Euro Crisis to explode in 2012 and stocks to plunge hard from these levels is very much a consensus view. The first part written on Wednesday is to help time the markets in a better fashion and not chase the upside move for now. It was not written as a gloom and doom post to let you know equities will tank from here. So in other words - yes, I am looking for a correction in equities, but I am saying that it will be a buying opportunity as the year surprises to the upside, not the downside.

Quote Of The Day

"For to win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill." ~ Sun Tzu

Chart Of The Day

Down almost 6% last night, over 9% for the week and almost 40% in the last 12 months, the question is how much lower can Natural Gas go?

Stocks: Possibility Of A Correction Approaching - Part I

In yesterdays Quote Of The Day post, a bullish comment about Chinese stock markets was made. I tend to agree with that comment and I was actually going to write about it in today's stock post update. However, I feel there is a more pressing issue at hand and that is the possibility of a correction in coming days or weeks. As a matter of fact, a good friend of mine wrote to me specifically about the topic in various emails this morning. So let me put forward some evidence I am looking at...

Economists Are Bullish

According to the Citigroup, economic surprises in the US, as well as in the overall Developed Market space, continue to come out on the upside. That usually means economists are now too optimistic on the current set of data and will be rising their expectations in the future. As we can see from the chart above, that usually but not always, creates under performances with the S&P 500. Many investors seem to think that there is a lot of similarities with mid 2008, but I am not one of those.

Having said that, this type of a signal tends present excessive bullishness towards pro-cyclical type of stocks that link to strong economic performance and therefore could be used a contrarian indicator to shift towards more defensive sectors.

Technicians Are Bullish

After reading several newsletters from investment banks on technical analysis, I noticed that the consensus seems to be leading towards a potential bullish outcome every since the 200 day moving average and the triangle inflection point was broken on the upside. The problem is that majority are looking at the same pattern outcome and executing it on the long side. When you are following the herd, also known as dumb money, you do not stand with high probability that you will be right on your trades.

Retail Option Traders Are Bullish

That perfectly links us to our next topic. The chart above, thanks to SentimenTrader website, shows that the overall Put Call Ratio is heavily leaning towards persistently large number of Call buying. It seems that majority of the retail investors now understand that the "triangle" as well as the "200 MA" is broken and therefore majority of these investors are place bullish bets on the market. On top of that, retail investors who use Equity Only options, are also displaying optimism for stocks.

Contrary to that, I have also noticed large Put buying with smart money traders, who usually use the S&P 100 OEX options. The readings over the last few days have been up to 3 times more puts than calls, which is usually quite an alarming signal (not shown in the chart here). On top of that, the Volatility Index (VIX) has now fallen to levels not seen since late July, prior to the S&P downgrade of the US. I wouldn't go as far as to say market investors are complacent, but I would say that current VIX levels have also reduced the price of Put options to more affordable risk reward ratios. In other words, we can at least say that smart money is using cheaper options to hedge their gains.

Retail Investors Are Bullish

As I already covered in the Chart Of the Day post last week, AAII sentiment has now reached a level usually associated with short term pull backs or corrections. Bearish sentiment particularly is quite worrying as only 17% of all participants surveyed were bearish. That is the second lowest reading over 5 years and warrants some caution. On the other hand Investor Intelligence Survey does not show excessive optimism as of now.

Breadth Is Overbought

Some of the breadth signals I follow are slightly overbought at present. The 10 Day Advance Decline Line is currently at overbought levels, which at times leads to a mild correction as we can see from the chart above. On top of that, percentage of stocks above the 50 day moving average is now entering 80% plus level, which tends to be overbought too.

Finally the up-tick, down-tick close breadth measure (TICK) is now approaching overbought levels over the last 10 day average readings. Usually equity markets tend to struggle with gains when TICK gets this overbought as we can see from the chart above.

Blue Chips Are Overbought

Finally, blue chip stocks like McDonalds and Apple, which have been bull market leaders since March 2009 lows, are now extremely overbought and at 52 week new highs. Of course, that does not mean prices could not go even higher, but I'd be very cautious about investing in these types of equities right now. They seem quite stretched from their 200 day moving average, so I'd rather wait for a pullback instead.

Summary

There is a significant evidence that equity markets are potentially setting themselves up for a correction of some type. Certain investor groups within the market are showing optimism, be it economists or options traders. Furthermore, it should be windily known that as of mid to late January, equity markets tend to experience a bad seasonal effect. Therefore, there is a tendency to sell stocks into a January reporting season.

So what does all this mean... a continuation of the bear market?

I highly doubt it. Quite to the contrary, I'd argue that this will be a slight bump in the road as the market grinds higher towards a new 52 week high later in 2012. I would be looking for the S&P 500 to at least test, if not better its May 2011 resistance in months or quarters from here. With investors extremely optimistic on the Treasury Bonds and the US Dollar, I'd rather think that the major surprise after this correction, will be decline of those Safe Haven assets (but more on that in coming days / week).

Quote Of The Day

"Yes, I am aware of that because they [deflationists] focus say on one sector of the economy, which is the housing market, or they focus on the debt deflation that we have at the present time to some extent because the household sector has been reducing its debt on credit cards, and we have also some de-leveraging in other sectors of the economy. But that is offset by the government fiscal deficit and at the same time also by monetization on a massive scale. So I do not really see any deflation in the system at the present time." ~ Marc Faber

Chart Of The Day

Weekly Recap: January 2012, Week I

Blog Summary

Thursday - Credit: European Situation In Charts

Tuesday - Portfolio Update: Long Silver

Sunday - Happy New Year To All!

Wednesday - Interview: Jim Rogers On CNBC

Thursday - Poll: Best Asset Class For 2012?

First week of 2012 is done! As I have not been as active as I usually am, the above is a summary of the last week of December 2011 and this recent week. I shall return to more active posting schedule in the coming week.

Market Summary

I was looking at some sentiment indicators over the Christmas and New Year period and I noticed that while investors were quite optimistic on Crude Oil, they were decently negative on Heating Oil. I was wondering if that type of discount will create an arbitrage opportunity of some kind. Well... judging by this weeks price action, Heating Oil definitely caught up with a very impressive 6% gain. Other notable gain was Cotton.

On the other hand, decently large weekly losses were present in some Agricultural commodities including Wheat, Cocoa and Oats - all of which declined by 4% or more. Oats, especially stood out from the Grains sector, with a large 7% decline. Finally, Euro was experiencing another one of its miniature free falls from $1.31 earlier in the week, all the way down to $1.27. Speculator positioning once again creeped up to new record high.

Talk Of The Week

Surely it has to be the New Years eve / day celebrations, instead of another week dominated by Eurozone collapse stories. On the other hand one could claim that the talk of the week has been about 2012 predictions, which I already discussed previously with our blog poll article. While the voting is still on going, many readers have asked me to write some type of a prediction as to what I see could occur in 2012. I would rather not engage in astrology, fortune telling and market forecasting, but since more than a few of you have asked, I would also rather not be a hold out either. So here goes nothing...

1. Treasury Note Yield Will Rise Above 3%

According to the media, the European situation is on the verge of total collapse as a Greek default triggers domino effect throughout the whole EU. Fair enough, I am not one to disagree about this outcome, but I disagree about its timing and that it will happen in 2012, as majority are expecting. So my view is that Treasuries, with such low historical yields, will reverse in 2012 and experience an awful year, after being star performers in 2011. I personally think there is a very good chance that the US Treasury 10 Yr Note Yield moves above 3% or even higher, while the 30 Yr Long Bond moves north of 4% once again. Currently, as I am writing this the 10 Yr Yield is at 1.96%, while the 30 Yr Yield is at 3.02%.

2. Wheat Prices Will Gain Handsomely

I am very bullish on Agriculture, which is not the most accepted outlook when one is constantly bombarded by CNBC to Bloomberg on how harvests are better than expected, while the global economy is slowing. But I have to admit that it must be quite insane from consensus's point of view, for one to be predicting that one of the most shorted and most hated commodities - Wheat - will gain in 2012. There are plenty of bears on Wheat, there are plenty of stories about oversupplies, and as we can see from the chart below, there are also plenty of short positions. My view is that Wheat will not only gain during 2012, but it will be one of the best performers. As one of the major surprises of the year, Wheat will quite possibility spike to a new high above $9 a bushel.

3. GEM Equities Will Outperform US Equities

Goldman Sachs recently put forward a view, in a Bloomberg article, that the best of Emerging Market growth is over after a decade long boom. With record mutual fund outflows and slowing growth, Goldman's view is to stay away from GEM equities as they could drop by another 20% or more in 2012. In light of this article and many other indicators I follow, I happen to think that Emerging Markets relative to Developed Markets (especially relative to the US), are extremely cheap. So in 2012, my view is that Emerging Markets will outperform nicely and surprise many with a substantial gain.

4. Financials Will Outperform S&P In H1

Financials have been a disaster in 2011 and have under performed the S&P 500 for over two years now. There are so many investors, including smart money Hedge Fund managers, who got completely fleeced by the recent August crash in the Financial Sector. Many major banks and financial institutions have actually fallen so much that they do not trade any higher than March 2009 lows in nominal terms. While I am not bullish on this sector in absolute terms, I think that for the first six months, Financials will outperform the S&P 500 in a similar fashion to March 2009 until November 2009. Financial Sector leadership on a relative basis will signal a strong bull trend for the overall equity market, which "could" take the S&P 500 to a new high in 2012.

5. Euro Will Top Its 2011 Highs

As I already described the European situation in point No. 1, I will not go over it again. As one can see from the chart below, there are plenty of bears on the Euro just like the Wheat market. But this is more than that, this is a full out short fest as every single bear has left the cave. Even the Super Bears like Gary Shilling or John Taylor see Euro Dollar at parity again. In financials markets, it is not enough to just be a contrarian. Instead, what is required is that one has to be right, while consensus is wrong, and to be a contrarian. Therefore, one would say, betting on the Euro is just a contrarian trade with no fundamental foundation - as the Euro's conditions are terrible. Personally, I agree.

However, you see currency investments are relative and not absolute. The Euro is competing against the US Dollar here. Majority of the investors constantly forget that they are selling the Euro only to buy the US Dollar. All of a sudden, my view on the Euro changes as there is no match for the awful fundamentals the US Dollar brings to an investor. So to conclude, while everyone is negative on the Euro, I happen to think it will surprise on the upside, not because it has strong fundamental outlook, but because the focus will turn back on the US Dollar. Adding further fuel to the fire and making this call almost impossible is my expectation that the Dollar will make a lower low this year. The call is so impossible from today's perspective, that a close friend of mine has engaged me in a bet over a bottle of alcohol!

We will come back in several months to see our progress...

Chart Of The Day

Historically, the current business cycle expansion is now in its last inning. It is a fact that recessions in the US occur every 4 to 6 years, so by the end of this year leading into 2013 or the end of next year leading into 2014, a serious downturn is in the cards for the Western World. And with fiscal stimulus bullets all shot in 2008, what will governments do the next time around?

Quote Of The Day

"I never try to predict or anticipate. I only try to react to what the market is telling me by its behaviour." ~ Jesse Livermore

Chart Of The Day

Today's chart of the day focuses on AAII Sentiment also known as opinion of retail investors. This weeks reading came in showing 49% bulls and 17% bears. Now, the spread came in at 32, which according to my chart is now extreme territory. On top of that, 17% bears one of the lowest bearish readings in over half a decade.

Mix this information with large amount of Call buying in the last several days according to both ISE and CBOE; and than add the January correction effect - which usually seasonality wise occurs mid month - and you got yourself a cocktail to worry about. While this might not spell trouble, it does spell c-a-u-t-i-o-n.

Poll: Best Asset Class For 2012?

First of all, I would like to apologise for the lack of posting during this first week of January. While I am not taking a complete break from the blog during this holiday season, I have only posted limited amount of material recently. I am still working behind the scenes and I do have much to write about, but the break enables me to spend some time away from the markets too. Things will return back to normal in the coming week or two.

In the meantime, I take it everyone has been reading the onslaught of Wall Street predictions for 2012. It seems the whole industry loves this ritual of predicting what the year will be like. They usually do their top 5 or top 10 predictions, which makes me think how many do you actually have? Honestly?

I guess it cannot be as bad as the Mayan prediction of the world ending in 2012, so I'll take anything better than that as a positive or "bullish" outlook. Yes, even the Eurozone break up / meltdown would be more bullish than that. Now, I will also not get into the ritual myself as I always prefer to leave predictions to astrologists, fortune tellers, weather forecasters, dream interpreters and finally "Wall Streeters" - you know aka the expert economists and stock analysts. In all honesty, what could I tell you, that you already have not read or heard about?

And on a more important note, since this type of predictions are everywhere, nor matter which site or blog you visit (apart from maybe this one), I thought it would be interesting to see what you boys and girls think about 2012. Where are we headed in terms of absolute or even relative performance? Which asset classes will do well, which won't? Where should one park their money? Tell us what you think and leave a few comments with it...

p.s. I'll be the first to vote and I'll tell you that my pick for the best performing asset class of 2012 is Agriculture futures as in Grains, Softs and Livestock.

Which asset class will outperform in 2012?
	US Equities (SPY)
	EU Equities (IEV)
	GEM Equities (EEM)
	Gov. Bonds (TLT)
	Corp. Bonds (LQD)
	GEM Bonds (EMB)
	US Dollar (UUP)
	EU Euro (FXE)
	JP Yen (FXY)
	Agriculture (JJA)
	Energy (JJE)
	Indu. Metals (JJM)
	Prec. Metals (JJP)
pollcode.com free polls

Interview: Jim Rogers Talks Currencies On CNBC

As I have been saying for awhile now... the Euro will surprise to the upside big time in 2012. As a matter of fact I have a bet over a bottle of alcohol with my close friend over it.

Happy New Year To All!

Sydney, Australian icon city, put on a great show last night, according to my brother currently there with his close friends. Amazing picture from the beautiful harbour and on that note I wish all a very happy new year and a very prosperous one too. May all of you make a ton of money in 2012, after all that is why we are in this business!