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Market Outlook

Let’s start with the transports which are the greatest sign for concern for the general markets.
transports warning

You can see a failure to make new highs, a breach of prior lows, and a breach of the long term trend channel. However, in order for markets to be confirmed bear market, you need ALL major markets to show the same thing.
So let’s look at the S&P


If you were to draw a single trendline from the lowest low to the most recent low, you certainly have a trendline breach. However, the trend channel appears to be intact, and because the most recent low didn’t close the week below prior low, it remains unconfirmed by some definitions. However, the weekly close of week ending 1/16/16 was a lower weekly close than the prior weekly low (on closing basis), we have a lower weekly close than the 1/16 close, so it’s definitely leaning towards confirmed breach of recent lows. Nevertheless, the oversold conditions near a long term trend channel support is certainly a historically a good location to be a buyer, not a seller.

Let’s look at the dow.


The long term broadening pattern formed resistance that temporarily was broken to the upside but failed to stay above. As we zoom in we can see that the long term trend channel has been breached. The rest is a little confusing once again because the daily/intraday shows a higher lows, but on a weekly closing basis we have the current recent low lower than the last 2 and a pattern of lower lows and lower highs on a weekly closing basis.

Finally, I saved the most fun chart for last, the nasdaq.
nasdaqWe can see that the all time high of 5132.52 acted as resistance, even though we surpassed these highs briefly. Also interesting is that the next high following the 2000 top is acting as support. The recent low is above the October 2014 closing lows, but below the August-September 2015 closing low despite being above the open of August 24.

In conclusion, there isn’t a clear, decisive bear market underway just yet. There is some evidence for a range bound market, some evidence for a short term bounce, and some evidence that an intermediate term, or even long term correction may be in development (unconfirmed).

However, the signs suggest considering caution into strength moving forward. There certainly is evidence pointing towards a short term correction if you are judging off of the weekly closes of the lows. The fact that ALL markets are showing a lower low on a weekly closing basis than the low made in the August-September 2015 time range is significant enough to create cause for concern and a minimum of lighter position sizes and/or number of positions moving forwards. This concern is increased by the fact that the July 2015 high has not been breached, but in the current position (short term) are somewhat mitigated by the location of stocks still in an oversold condition near long term trend channel support.

If you were to draw a single trendline from the 2009 low to the most recent significant low, all markets show a breach. You would thus consider selling the next bounce or the retest of this breached trendline in a 1-2-3 trend change. The retest would probably correspond to up to a 3-5% rise in the dow.

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More Than A Hedge

I am long the Dollar, via some Jan 2014 calls and I view it as more than just a hedge.

First of all, it’s mispriced. Value 0.40, price .36 (mid) That provides an 11.11% premium to it’s calculated value.
uup option calc
Secondly, the technical picture is bullish long term. Ascending triangle with declining volume profile above. Looks good on a monthly and weekly chart.
Thirdly, this is confirmed by the Bearish Euro and Currency Appears to be Shifting.

Also, by buying lots of time value (something I don’t always like to do), I protect myself if I am wrong. Although you typically are better off betting on a short term swing for a maximum percentage gain if you are right, if it goes against you it hurts you. When the option is made up of all time value and you have more time value than you need, if it goes against you the majority of the position is intact providing a huge margin of safety, something that I like a lot more when I am producing a longer term “hedge” play since I also am paying less PER month of “insurance”. By managing Theta like this I can still sell or roll the option in a few months with minimal loss. I still think the potential to gain is very high but it’s a longer term pattern anyways and something I am looking more at as protection that allows me to stay aggressively long in other names without being significantly at risk. I still end up preserving some capital should everything go wrong and somehow markets decline while the dollar tanks because there will still be people willing to pay for the “potential” of the dollar going higher as long as there is still a decent chunk of time left on it.

Finally and perhaps most importantly, I believe we are headed into a period of time like the early 80s marked by declining commodity prices, rising dollar, and rising stock prices. (I think commodities MAY be the exception at some point but think the metals for example have yet to bottom)


Chart of the day shows US nominal and real effective exchange rate for long term cycles lasting 6-10 years, march 2013

I don’t think you realize what a tremendous opportunity this could be. You can effectively look at it as a hedge that has a strong possibility of doing well. It’s entirely possible that the dollar goes higher WHILE the market goes higher. If I am wrong, then it still has a strong possibility that it protects you from the downswings and hedges you from market panics as we enter the volatile and dangerous period in May and through October Period where historically market has been flat to down and highly volatile. If my timing is wrong I provided you with a contract that has plenty of time left on it to allow you to do something with it (roll it, sell a shorter term contract against it, or sell and still preserve some value)

I just don’t think anything is going to replace the dollar anytime soon. The Euro is structurally flawed and the Yen has too much government restriction/interference and is determined to inflate. The Cyprus event not only exposed the dangers of a currency with inflationary checks (which made it deflationary), but also is likely to scare capital in the Euro if there is even the suggestion or rumor that the governments are having troubles.

Just like in the US when depression happened because The US was in a gold standard, Gold could not easily and freely go up in price so everything else had to go down in price. The Euro has an inflationary check and inability to inflate easily as they did not create as elastic of money supply like the US. As a result since they can’t as easily print, they previously had to hike rates to attract capital since the money supply was somewhat fixed. and since there was no central euro bond individual countries came up short which resulted in eventual bailout from other members of the euro anyways, and with individual country bonds you could still pile on and effectively get short the countries “currency” anyways through trading the individual bonds.
Well we all know the problems that this has caused. First of all, politicians got elected by promising things, delivering and not creating plans to financing it (kicking the can)… But this is not the dollar and the currency doesn’t function the same way. You can use austerity and higher taxes to attempt to raise capital when you are short on it, you can attempt to decrease payments by forcing bond holders into taking a haircut (but which may cause trust issues in the bonds and currency in the future), or you can even go crazy and rob the depositors like Cyprus event. You can also go to other countries and get a bailout. But all of this action is mostly deflationary except the bailouts and deflationary type of action has slowed growth and cause the debt to go up which makes even Germany at high debt to GDP levels. The ironic consequences of the euro’s action is likely going to be a loss of confidence anyways as capital is going to flea into markets and into the dollar. But the euro has to inflate, they have no other choice as the deflationary spiral as a result of their inelastic money supply isn’t working. And when it comes down to it I believe that is what they will do.

But this brings us back to the dollar. The dollar’s demand has been absorbed globally. Hence low interest rates have failed to really create a lot of inflation, particularly in commodities and the fed is probably freaking out. All the low interest rates have done is create larger and larger “short” positions in the dollar around the world as people borrow money betting on inflation or borrow money at a low interest rate and lend it out at a higher one still creating the same effect of someone betting on inflation one way or another.
The low interest rates aren’t good for savers, retirees and pension holders and the fed needs to dump their bonds at some point as well. I don’t think the policies will continue and feel there is a shift taking place. I don’t think the dollar can be tied down much longer nor can the interest rates.

But what happens when you hike the interest rates? There’s a belief that the markets crash and demand for real estate drops. Historically that doesn’t appear to be true as bull markets correlate with rising interest rates. Partly that is because it means their is a demand for cash because businesses are actually growing and borrowing money to grow. Nevertheless, it could be problematic as the banks likely aren’t going to be as willing to borrow money at low interest rates and speculate in the market. The demand for cash continues and people perhaps start saving and paying down their debts. On the other hand, people believing that interest rates would keep going down may actually rush out to buy a home or refinance while they can. People like low interest rates, but only when they start rising do people fear that they will really start going higher and so they rush out and buy only AFTER interest rates begin rising. In theory they borrow more at 3% than at 4%, but not if they think it goes to 2.8% the next week.
It will be a very strange market that seems to violate the classic economic textbooks and that’s mostly because the textbooks aren’t based upon globally interwoven economies. As a result I believe there is a tremendous opportunity.

Both being long the dollar and being stocks may produce winning positions while also protecting you from panics in the market. If that happens, people also flood into cash.

The ability to bet heavily on the dollar with option positions provides the ability to stay aggressively long the markets in individual names with great setups. Meanwhile if you want another way to reduce correlation, to stay long the market with less worry about what happens, you can learn to get good at picking individual biotech names. Of course it’s not without risk. You could see a dollar down, market down scenario I suppose but I’m willing to bet you that doesn’t happen.

Long UUP Jan 23 Calls (and previously long Jan 22 Calls))

Also Long the Option Addict and IBankCoin



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Hi, Ho Silver! Buy Alert, SLV Weeklys and APR expiration

Silver dipped below 31.50 so I bought calls because I feel it is on the verge of doing something soon. A long term chart shows silver coiled up here. Since it is a long term pattern a daily close below support would not be that significant, but a monthly close would be. As we approach the end of the month, I decided to play the dip by buying in anticipation of a bounce.

Do not confuse this with a long term play as below support there lurks danger.

1)I think bulls will defend this month and try to keep gold above 30.50. If they defend successfully, we could rally strongly here.

2)If they fail to defend (as it looks like we are headed for if we do not get a change in trend) I suspect they still attempt a short lived rally right here or in a day or two before we trade lower to close out the month. The downside move in the short term, likely has played out or is close to it (unless we are on the verge of a long er term breakdown.).

3)Worst case scenario for weekly calls is we dip below 30.50 and rally to close the day just above it to give a signal that we will likely see new highs in the future or near it to give really a lack of a clear signal.

4)I bought calls instead of SLV because I feel that we potentially could crash very hard in a very short amount of time if/when we breakdown and I wanted to limit exposure. A lot of the buyers that want to buy for the time being have done so leading up until the peak (and the peak of gold)

5)In hindsight, I am having buyers remorse a bit. Not that I regret buying but I bought weekly calls in addition to april calls. I should have probably only bought the APR calls because then I still have enough time left come first trading day of April to determine if the bulls defended successfully or not, and to get out of the trade with still some premium, and I can still sell a short term bounce if I nail the bottom here. APR calls probably offer the most flexibility. If you are after stability per dollar risked, you need to buy longer term calls s there always is a healthy time premium if trade goes against you. This way, your percentage loss is less, even though your percentage gain is limited. I am not aggressively loading up on calls here, just a few extra calls beyond what I would have to replace the underlying if I were to buy SLV here.

I will reevaluate come April 1st for potentially rolling options to a longer term hold, or playing the downside with longer term puts.

A little bit backwards technical analysis is done here as the downside target was  around 31.50-32 in silver and we are at these levels and typically that is a signal to get out of any bearish bet. I did use some GLD and SLV puts as a hedge but I took off the trade earlier this week. Bulkowski’s research (in his book Encyclopedia of Chart Patterns
) on technical analysis gave me an interesting idea of flipping it on it’s head. A lot of stocks might breakdown an average of 20% with a particular pattern but then they on average, once the trend reverse I believe every pattern would end up higher than the breakdown point. So either accumulating a position as it breaks down or buying if it reaches the downside target actually MAY be a good decision, although it generally lacks the clear need of support and where to sell making it difficult to manage. So I rarely plan on doing this, but the move is coiled up and near support so it is manageable and makes sense to me. I also like the idea of buying a business or commodity at a LOWER price as a result of technical analysis even for a dip buy, but the clear problem in many cases is management of the trade.

Personally, in the grand scheme of things I prefer a monthly close below 30.50. The reason is, a breakdown lasting until most of 2012  (August is est. time frame for end of the move with possibility it spills over into early 2013 not outside the range of possibilities) would be excellent for managing my trades. Even though I am hoping for a dip in stocks before I get too aggressive with my cash hoard, with the VIX low I am content to place a small amount of capital in options and play the upside. But while doing so, I feel exposed, and if I could hedge with some SLV or GLD puts every now and then it would allow me to get more aggressive. Additionally, I feel a strong correction in 2012 will be helpful as it will flush a lot of buyers out, work off the overbought levels and set the stage for a run up in gold over the next several years, because nations around the world are in trouble and all the money in bonds has to go somewhere, especially when every bond printed is also a dollar that pays interest and accumulates more debt as a result. The higher interest rates will result in higher debt payments when the DEBT is rolled. FYI Spain and Portugal will roll their debt in 2012 here. It is not just Europe, but JAPAN has a very poor debt to GDP scenario as well and the US has lots of unfunded liabilities, although debt to GDP is not as bad as other parts of the world. I don’t know who started the idea that higher interest rates were “bearish”. This is sometimes true perhaps, but when Japan has lowered interest rates for decades as their stock market declined, or the lowering interest rates during 1929-1932 (yes they hiked it at one point then immediately started easing. Whitney Tilson and others have shown that stocks tend to be more bullish with rising interest rates. Robert Prechter, and others showed how major depressions and declines happened during periods of falling interest rates. Rising interest rates means MONEY is in demand and people are willing to pay up for it, and are not willing to  accept low yields with money on sidelines while there are so many other places to put the money.

Well I am getting off on a tangent now like I do too easily, but for now there is a ton of speculative excess still in gold and silver markets that could potentially be squeezed out even though a significant part of that move has happened. If we rocket higher from here instead, in the long run, I think silver and gold will top out sooner, and crash harder for longer, and be less predictable. A healthy correction would be favorable in my opinion. I may be getting a tad overzealous here and it may be more prudent to wait until April 2nd to place a trade in precious metals when we know whether or not we hold monthly support here around 30.50

If we break down, the initial breakdown of the longer term chart gives a target is around 25. secondary target could even be as low as 15. but I suspect we will set up another pattern by then if we breakdown
If we hold, initial pattern doesn’t face resistance until nearly 35 with huge upside if we break resistance from there, which I suspect will happen (IF we hold the monthly level significantly above 30.50).
I would say this month is pretty much do or die for the bears on whether or not we will see a deeper, healthy correction this year.

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Mini Monthly Trend Report Market Update

Money is pouring into stocks, particularly financials right now, Central Banks are buying US equities, oil is set on fire and the stocks, especially the leaders held up strong in the face of metals like Copper and Gold and Silver tanking yesterday.

Well the market also gets pushed further into risk with the low yields, the Soverign Debt Defaults and “not actually a default” ruling and the people starting to realize their CDS are as about as worthless as the subprime derivatives and negative real yields make bonds not so great.

All the money sitting around gets pushed into stocks, parked into real estate, and sheltered overseas away from the money squanderers in government in the west, and instead into the benefactors. Well US companies benefit from cheap labor overseas, entitlement spending at home and stimulus to the consumers, devaluation of individual wages and many of the american companies are expanding globally to markets that benefit from the spending and exporting of the capital via debt interest payments to creditor nations. Oh certainly bonds outperformed in the last 30 years but following a 30 year trend, 30 years into it is insanity. Don’t get me wrong, the “risk off” trade is still to US dollars and bonds, and so some TLT position to take advantage of the “risk off trade” is perfectly fine, but I certainly wouldn’t want to be reaching for yield at this low levels. I understand some older people need income for retiring, but I would still rather put a significant amount of my money in high yielding stocks t this period of time. You do not want to follow the trend of baby boomers moving to bonds because it will not last. The yields are near or at long term extremes. Compare stocks to bonds and stocks are for the first time in a very long time, finally at least reasonably priced relative to bonds. Relative to real estate bonds are just barely at what I would consider extremes as well.

I believe that is the long term trend that we have in store for us but lets be honest, even with all that going on, how can appl continue to act like it is a small company that just smashed earnings by 100% and is just starting to get recognized by institutional investors every single day? It’s not that it isn’t undervalued but how often do stocks go straight up in the air indefinitely that are already $500 Billion dollar companies?

Although I refuse to put a large % of my overall cash into this nonsense until we get a meaningful correction, that does not prohibit me from occasionally getting aggresive via OTM calls. And the Financials are breaking out, or BTFO as RC likes to say.

The Nasdaq is nearing extremes

Look for a break in trend and a shift in the nasdaq back to the dow, or else wait for dow/nasdaq to get below 4 before playing (as a contrarian play).

I will have the rest of the March Trend Report Up in a few days, for now just some minor observations and highlights.

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Historic Investing Valuation Extremes Point To Real Estate In 2012

Let’s have a look at housing. Real estate in 2012 looks like a good investment in the US. So why exactly might buying real estate as an investment in 2012 be a good idea?

According to Shadowstats, inflation adjusted income is at 1950 levels. Of course, production has been high and we have been doing more with less, and technology has evolved so that does not mean we are at 1950s life style (the current official CPI numbers uses hedonics and subsitutions so that basically inflation is more a measure of quality of life rather than the monetary expansion and effect on price. I.e. a computer costs $500 now when in the 1990s it’s costs was $2000 so even though that occurred as a result of production it is considered deflationary. It just means that gasoline and food prices are high which aren’t reflected in the official CPI numbers. Well if there was this sort of drastic reduction in inflation adjusted income, it would only be logical that home prices on the same measurement were adjusted to 1950 levels. We can see that at this point it is actually significantly lower. In fact it is at it’s 1920 levels at all time lows. If you compare income from 2005 when housing was significantly higher priced to what it is now, there is not enough of a reduction in inflation adjusted income to justify the inflation adjusted decline in real estate. I realize that some people have issues with using the shadowstats site so going forward I will only use the official CPI adjusted. Well even if you use the official CPI you can see income since 2005 has not fallen much but home prices have. On the other hand if you consider income at around 98 or 88 levels then we are not quite back to where we started. However, let’s not forget that interest rates are lower and thus a monthly payment on a house will be less as a result of lower interest rates.

Is there any indication of when things will become under valued enough to be worth looking at other than just CPI? Yes, we can look at a historical valuation perspective relative to other assets. This time I will use the official CPI to give us a price of home, and I will see how it compares to stock valuations. I use 1 divided by the 10 year trailing PE plus the dividend yield for that single year and take 1/ that number to convert it back to PE. Then I will adjust it so high home price and low valuations of stock to represent a high number so that the high number represents a time when real estate is overvalued relative to stocks and a low number will represent a time when real estate is undervalued relative to stocks. So I will take the Case shiller index divided by this stock valuation.

I took 10 divided by the bond yield to convert it to price so that a low number meant the bonds were undervalued and provided a high return similar to like a did with a low adjusted PE for stocks. For some reason I took bonds divided by the shiller instead of the shiller divided by bonds, so this time a high number represents when bond prices are high and their yield is low and interest rates are low and home prices are low so the ability to finance a property is good and also the need to hold your money locked away in bonds is low.

Well, we can see there is a reason to consider shifting some capital into real estate, particularly if you can rent a property and get positive cash flow and build equity from which you can use to get a loan to acquire more properties and more cash flow and continue this process over time while prices are low relative to other assets.


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