The Daily Trading Report | Taking Control Of Your Financial Destiny

Shipping Stocks Set to Fly

March 9th, 2010 § 0

Everyone these days seems transfixed on the behaviour of the Baltic Dry Index, perhaps too much so. Does anyone realise how the Baltic Dry index is calculated? In essence there are four dry bulk carrier classes ranging from the super large Capesize class to the smaller Handysize class. There are relatively few capsize vessels compared to handysize vessels. So demand and supply of capsize vessels can vary dramatically relative to that of handysize vessels. Now the Baltic Dry index is made up of the largest of the four shipping classes (capesize, panamax, and supramax), the smallest class (again handysize) is not included. So what is the point of all of this? Well don’t take too much notice of the Baltic Dry Index, it is often misleading due to the erratic demand supply behaviour of capsize vessels. You would be much better off studying the demand and supply characteristics of the Baltic Handysize Index instead.

Now doesn’t the behaviour of the chart below (the ETF SEA) look remarkably like the Baltic Handysize Index! Of course beauty is in the eye of the beholder………..to us simple folk it looks like shipping rates are set to move higher and along with it shipping stocks. Perhaps it does not take a rocket scientist (economist) to work out that commodity prices are also set to lift-off over the coming weeks!

World Financial Markets in 8 Charts $VTI $DBC $TLT $GLD $JNK $UUP $DBV $GWX

March 9th, 2010 § 0

Markets are on the verge of breaking out of their respective holding patterns. The breakout is likely to be rather dramatic with many of the charts below (representing the major asset classes) being more or less unchanged since at least October last year. A general rule of thumb is that the longer a market moves in a sideways direction the greater will be the intensity of the breakout.

Now notice how close many of the charts are to breaking to multi-week highs (equities, commodities, gold, corporate debt, and high yield currencies) or multi-week lows (US Treasuries). Which market will break first? We don’t know for sure, but what we are reasonably certain about is that once one breaks the rest will follow in quick succession.

We continue to be positioned for bullish breakouts in equities and commodities and bearish breakdowns in US Treasuries and the US Dollar.

This Week in the Markets

March 8th, 2010 § 0

This Week in the Markets is a weekly series that describes, at a very high level, how we manage our long-term portfolio. We use John Murphy’s inter-market ideas, looking at the performance of equities, bonds, commodities and foreign exchange markets. We attempt to measure appetite for risk, and from that draw conclusions on whether to go long or short these asset classes.

We have various proprietary market algorithms, risk and commodity indicators that we use. But they are for another article. What we show here is intended to be understood and acted upon by investors of every level.

Before we begin let us just remind ourselves that the Euro has not broken down over the last few weeks, despite a backdrop of unprecedented bearish sentiment. Definitely where the action will be this week; more on this further down.

World Equity Markets

The Dow Jones World and Dow Jones World Small-Cap indices are as broad based as you can get. Over the last week investors have demonstrated that they feel equity markets are undervalued and that appetite for risk is back.

US Bond Markets

Here we look at US Government Debt (as measured by TLT – 20 Year Bonds) and US Corporate Debt (as measured by JNK – Corporate grade debt). We see this relationship as risk appetite indicator.

TLT appears to have resumed its downward momentum, whilst we see steady support for JNK. This tells us that investors are increasingly prefer corporate grade debt compared to government debt. In other words, investors are prepared to risk their capital on the higher, but riskier, returns of business.

From this we conclude that risk appetite is increasing, or at the very least not decreasing. Hence we will maintain our short TLT and long JNK positions.

Commodity Markets

We use commodity prices as indicators of supply and demand for physical things, be it food, railways, motor vehicles, electronic goods, etc. Increasing prices indicates increasing demand (it may indicate decreasing supply of course – but this is one reason why use such a broad index).

In our view all investors should be regularly reviewing commodity price trends across a range of currencies.

Gold has been in the news of late. With several notable fund fillings indicating that they have taken large positions, along with several government treasuries increasing their holdings.

We think that this indicates a long term lack of confidence in US Treasuries to hold their value. The key phrase here is “long term”.

We will stay long Commodities and Gold and are prepared to hold these positions for a number of years.

Foreign Exchange

We’ve mentioned previsously that shorting the EUR/USD was the single most crowded trade that we’ed ever seen and were going to sit this one out (actually, just to be contrarian, we took a small long option, that is now in the money!)

We suspect that there will be some disappointed EUR/USD speculators out there, and would not be surprised to see a short-covering bounce soon. Those who utilized long term options for their shorting should be fine. Those who traded spot may be re-thinking their positions right about now.

Also note the performance of DBV over the week. We expect an upwards movement as the carry trade makes a return.

As a trading outlook for the next weeks, we expect TLT and $USD to move downwards, pushing $CRB to a multi-week high.

We also think that markets have moved sideways for the last few months and pressure has been building up. Breakouts, if the come, are liable to be quite strong. We are reasonably confident of breakouts occurring over the next few weeks. Risk appetite appears to be back.

Hubris knows no bounds, and, we could be wrong.

The Euro to Be the Tipping Point for World Financial Markets $FXE $FXC $UUP $TLT $USO $GLD $SPY

March 3rd, 2010 § 1

We would like to let you in on our way of thinking……or at least on what we have seen happening and what we “envisage” occurring over the coming weeks.

First cast your eyes on the futures charts below (specifically the USD Index, CAD, Crude, Gold, 30 yr, and S&P 500). What do you see? With the exception of the USD Index (and the Euro) we see markets that have essentially gone nowhere since August – October last year (that is a 5 – 7 month period). OK, so what? Well the longer a market moves in a sideways direction the greater will be the force of the breakout. So when the breakout comes it is liable to be violent.

OK so which way will markets break? Well this is how we see market trends evolving:

It all centres around the behaviour of the Euro. Yes the USD Index is looking rather bullish…….but is it? Take a look at the CAD Future, is this looking bearish? We think not. The USD Index is looking bullish primarily due to the weakness of the Euro which represents 55% of the index. But what happens if the Euro continues to fall? Yes it could but given the record amount of short positions on the Euro future we find it highly unlikely that there will be any more downside in the Euro over the coming weeks.

We believe that the Euro will bounce, because of less than bad data coming from the PIGS “fiasco”. This will lead to the Euro rising above the 1.38 level which will induce a wave of short covering. Needless to say the press will pick up on the dramatic improvement in the Euro and will find positive news to justify the move, maybe they will start looking at the problems of the US again (be it California, New Jersey etc). The big rise in the Euro will of course send the USD Index down.

This will lead to commodities (aka gold and crude) moving above resistance levels to multi-week highs,

Which will lead (or be preceded by the US 30 year yield breaking above the key 4.75 level (the future below 115)

…….and the S&P 500 breaking above the key 1150 level to a multi-week high.

OK it might not occur in that order but we think the “tipping” point will be a bullish breakout in the Euro. What will lead to the Euro breaking higher? Perhaps a butterfly flapping its wings over the middle of the Mediterranean!

Everything in this world is connected…………nothing exists in isolation!

CRB Spot Index Suggests Commodity ETFs Will Break to the Upside $DBC $DJP $GSG $RJI

March 2nd, 2010 § 0

The recent behaviour of the CRB index (and commodity ETFs in general) has been about exciting as watching wet paint dry! There has been considerable bullish (and bearish) talk on commodities yet as a “group” they have not moved since June last year! Certainly the behaviour of the CRB suggests that commodities have gone nowhere.

But wait, in the “real world” the picture is very different. Take a look at the spot commodity market. The CRB Spot index has almost reclaimed all its 2008 losses.

We place more importance on the behaviour of the CRB Spot index rather than the CRB Futures index because the spot index is free from the effects of differences such as backwardation and contango and thereby reflects the real world price behaviour of commodities. And what is in the CRB Spot All Commodities index? Here is a basic listing:

We think that it is only a matter of time before commodity futures break to the upside and with that so too will the big commodity ETFs (DBC, RJI, GSG, DJP)

This Week in the Markets

March 2nd, 2010 § 0

This is the latest of our weekly series “This week in the Markets”. We maintain a long term Asset Allocation Investment Portfolio and this series walks though our market evaluation process, albeit at a very high level.

We all must seek information from a variety of sources. A quick perusal of SeekingAlpha.com and other financial news sites brings forth a plethora of news, opinion, and the odd rather obtuse ravings of those howling at the moon. How does one separate the good from the bad? Modesty prevents us from saying read on!

As we wrote last seek, we look across the major asset classes (equities, bonds, commodities, and foreign exchange) and see to listen the markets lingua-franca; Supply, Demand and Price. Significant changes in any one of these represents both a trading opportunity and a signal to rebalance our portfolio. We believe that such a regular process should be an essential part of managing long-term portfolios.

World Equity Markets
Reviewing the performance of $DJW & $W1SML we can see an almost mirror image of performance between large caps & small caps; both are off the highs of earlier this year, but well off the lows of early February. Should the small caps diverge from the large caps we would view this as an “interesting” event, as yet this has not happened, prices have not breach lows, and so we maintain our portfolio’s long positions.

US Bond & Debt Markets

The following two charts represent government debt and corporate debut. Reviewing the relationship between the two parties provides insight into investor appetite for risk. We could consul against making judgements upon one or two week patterns; we use monthly timeframes to form our views.

Last week we saw a clear pattern of declining appetite for US government debt, and an increasing appetite for US corporate debt. Telling us that investors were looking to put their investment capital increasingly into the “riskier” commercial sector. A big vote of confidence for corporate America there.

This week the picture is somewhat cloudy, hence our view of not making decisions based solely upon weekly timeframes. With respect to government debt (TLT), clearly the situation in Greece, Ireland, Spain, and Portugal is having an effect. We cannot predict how long this effect will last, it may be short lived, or it may be long lasting and increase demand for US Treasuries.

At the moment, there are still underlying dysfunctions in the US economy (more on this below) and we believe that over time TLT will drift downwards again.

We maintain our shorts in TLT and our longs in JNK.

Commodity Markets

We view commodities, as measured by the CRB index, as an indicator of global economic performance. Again, we will keep things simple: when demand is increasing, competition for scarce resources causes prices to rise. Demand will increase when consumer sentiment is high and vice-versa.

What creates demand for commodities? Demand for finished goods.

What we can see by reviewing the CRB index and Gold as that demand, and thus price, for each has been consistently rising over the last six to nine months. Last week TLT had an inverse relationship to CRB and GLD, this week the opposite. All three have risen in tandem. We cannot help but see the continued rise of commodity prices as inflationary.

We will maintain our long commodity and gold positions.

Foreign Exchange

For any trader, this is where the action has been all week. Oh what fun has been had! Seriously, in this article we walk though our longer-term views, but really we live for the short-term market opportunities.
PIIGS is a term that has suddenly arrived, and is the major reason for all the excitement. We’ve watched the flow-on effects on the Euro, USD, CAD, and JPY, and seen the bearish sentiment toward the Euro rise and rise. There is of course all good reasons for this, but as we noted last week, shorting the Euro has become a very crowded trade. We were not surprised to see a small bounce back over the last few days of last week; and profited from some small call positions; nothing to dramatic.

We understand that the major market participants are waiting and watching to see how the EU handles the Greece debt situation as a precursor to problems of the other nations. Once some certainty is arrived at, we believe that confidence will be restored, and the significant amount of the bad news already priced into the markets will be pared. Of course, being Europeans, this will take awhile. There is an opportunity for long-term option spreads here; OTM long term Calls are very cheaply priced, one could match this with a more expensive ATM long-term Put.

In reviewing Europe, you should keep in mind that California is just one of a number of US states that has similar problems. California alone is much more important to the US, and the Global, economy than all the PIIGS combined.

To summarise, despite some recent market moves to the contrary, we don’t see the market as undergoing a significant change in long-term price action. So we will maintain our current long-term outlook of long JNK, Commodities and Commodity currencies, whilst being short TLT and USD.

Take Careful Note of the Behavior of Microcaps $IWC

February 23rd, 2010 § 0

A bull market is loosely defined as one where the average stock is advancing. One area of the market that is often overlooked is microcaps. Important behavioural characteristics can be gleaned from studying relatively illiquid assets of each asset class. In the case of equities microcaps are the most illiquid. Anyway, problems in equity markets often first show up in microcaps due to their relative illiquidity. Now if the equity market was genuinely in trouble then microcaps should have struggled to move higher over the last couple of weeks. Yet, as per the microcap ETF “IWC” they are a mere 2% away from their multi-week high. What do valuations look like? With an average price/book of 1.08x they are hardly demanding by any stretch of a rational man’s valuation.

Comforting behaviour for the bulls no doubt!

This Week in the Markets

February 23rd, 2010 § 0

For those unfamiliar with our weekly analysis, we are not trying to pick stocks or sectors here. Rather we are trying to “listen” to what the markets are telling us; by looking at the major equity, bond, commodity, and foreign exchange market indices. In doing so we attempt to measure the markets appetite for risk.
Basics are basics. We think of markets as pure supply and demand. If risky assets are in demand, their price will rise and similar to the “less risky” assets. From this we draw conclusions as to how we should allocate assets across our portfolio.

We have a much more detailed process than we show here and have our own proprietary appetite for risk index; perhaps we’ll release that publicly sometime.
And so down to business. Let us first focus on the equity markets, by looking at the Dow Jones World and World Small Caps Index. Keep in mind that we see small caps as riskier assets and so are firstly interested in any divergence between the two markets; of which, at the moment, there is nothing of significance.

Secondly, what does the price movements tell us? Well, it appears that equity market investors across the globe have regained confidence in their markets and are prepared to purchase equity assets again.

The price performance of gold is more than a little interesting. It has managed to maintain its value in USD terms whilst the USD has appreciated significantly against the all major currencies.

We could all argue for hours about the role gold plays in the financial markets, but all we can do at the moment is take note that there is still significant demand for gold in-conjunction with rising equity markets and an increasing USD.

Moving onto the bond markets we now look for signs of confidence in the riskier assets, corporate debt, as measured by JNK , and the “safer” government debt of US Treasuries as measured by TLT .

Clearly US Treasuries are continuing their downward momentum, unsurprisingly so. Much more interesting, to us at least, is the price momentum of corporate debt. This is a vote of confidence in business and is also complemented by reducing credit swap premiums.

We can only take this as a positive sign for risk appetite.

In commodity and high yield currency terms, the USD has not appreciated as the above graph would suggest.

Despite the recent price movements of the USD, we still have troubles with the euro, Dubai, and a whole lot more. We believe that the underlying reasons for the USD weakness of last year still exist and expect downward momentum to reassert itself over the oncoming year.

Nothing is ever certain, and as traders, we have to make decisions and live with the consequences. This week we have decided to maintain our long equity and commodity positions, and our short US Treasury positions.

This Week in the Markets $SPY $IWM $TLT $JNK $DBC $UUP $UDN $DBV $GLD $TBT

February 23rd, 2010 § 0

Every week we sit down and look at the markets from a high level. It’s a discipline that we go through without fail. It helps to remove ourselves from the day to day analysis detail and see the bigger picture.

For those unfamiliar with our weekly analysis, we are not trying to pick stocks or sectors here. Rather we are trying to “listen” to what the markets are telling us; by looking at the major equity, bond, commodity, and foreign exchange market indicies. In doing so we attempt to measure the markets appetite for risk.
Basics are basics. We think of markets as pure supply and demand. If risky assets are in demand, their price will rise and similar to the “less risky” assets. From this we draw conclusions as to how we should allocate assets across our portfolio.

We have a much more detailed process than we show here and have our own proprietary appetite for risk index; perhaps we’ll release that publicly sometime.
And so down to business. Let us first focus on the equity markets, by looking at the Dow Jones World and World Small Caps Index. Keep in mind that we see small caps as riskier assets and so are firstly interested in any divergence between the two markets; of which, at the moment, there is nothing of significance.

Secondly, what does the price movements tell us? Well, it appears that equity market investors across the globe have regained confidence in their markets and are prepared to purchase equity assets again.

The price performance of gold is more than a little interesting. It has managed to maintain its value in USD terms whilst the USD has appreciated significantly against the all major currencies.

We could all argue for hours about the role gold plays in the financial markets, but all we can do at the moment is take note that there is still significant demand for gold in-conjunction with rising equity markets and an increasing USD.

Moving onto the bond markets we now look for signs of confidence in the riskier assets, corporate debt, as measured by JNK , and the “safer” government debt of US Treasuries as measured by TLT .

Clearly US Treasuries are continuing their downward momentum, unsurprisingly so. Much more interesting, to us at least, is the price momentum of corporate debt. This is a vote of confidence in business and is also complemented by reducing credit swap premiums.

We can only take this as a positive sign for risk appetite.

The euro effect is being felt. We are wondering if perhaps it is becoming oversold. With so many short sellers this has become one of the most crowded trades that we have ever seen. Having seen some violent reversals in the past, we are sitting out this one.

In commodity and high yield currency terms, the USD has not appreciated as the above graph would suggest.

Despite the recent price movements of the USD, we still have troubles with the euro, Dubai, and a whole lot more. We believe that the underlying reasons for the USD weakness of last year still exist and expect downward momentum to reassert itself over the oncoming year.

We’ve now taken a very high level look at the equity, bond, commodity and foreign exchange markets. Our interest is what, collectively, can we learn about general appetite for risk and thus the most likely medium term direction of the markets.

Nothing is ever certain, and as traders, we have to make decisions and live with the consequences. This week we have decided to maintain our long equity and commodity positions, and our short US Treasury positions.