What’s next for the Dollar, Gold & Stocks?

By Axel Merk

Two rate hikes since last year have weakened the dollar. Why is that, and what’s ahead for the dollar, currencies & gold? And while we are at it, we’ll chime in on what may be in store for the stock market…

The chart above shows the S&P 500, the price of gold and the U.S. dollar index since the beginning of 2016. The year 2016 started with a rout in the equity markets which was soon forgotten, allowing the multi-year bull market to continue. After last November’s election we have had the onset of what some refer to as the Trump rally. Volatility in the stock market has come down to what may be historic lows. Of late, many trading days appear to start on a down note, although late day rallies (possibly due to retail money flowing into index funds) are quite common.

Where do stocks go from here? Of late, we have heard outspoken money manager Jeff Gundlach suggests that bear markets only happen if the economy turns down; and that his indicators suggest that there’s no recession in sight. We agree that bear markets are more commonly associated with recessions, but with due respect to Mr. Gundlach, the October 1987 crash is a notable exception. The 1987 crash was an environment that suffered mostly from valuations that had gotten too high; an environment where nothing could possibly go wrong: the concept of “portfolio insurance” was en vogue at the time. Without going into detail of how portfolio insurance worked, let it be said that it relied on market liquidity. The market took a serious nosedive when the linkage between the S&P futures markets and their underlying stocks broke down.

I mention these as I see many parallels to 1987, including what I would call an outsized reliance on market liquidity ensuring that this bull market continues its rise without being disrupted by a flash crash or some a type of crash awaiting to get a label. Mind you, it’s extraordinarily difficult to get the timing right on a crash; that doesn’t mean one shouldn’t prepare for the risk.

If I don’t like stocks, what about bonds. While short-term rates have been moving higher, longer-term rates have been trading in a narrow trading range for quite some time, frustrating both bulls and bears. Bonds are often said to perform well when stock prices plunge, but don’t count on it: first, even the historic correlation is not stable. But more importantly, when we talk with investors, many of them have been reaching for yield. We see sophisticated investors, including institutional investors, provide direct lending services to a variety of groups. What they all have in common is that yields are higher than what you would get in a traditional bond investment. While the pitches for those investments are compelling, it doesn’t change the fact that high yield investments, in our analysis, tend to be more correlated with risk assets, i.e. with equities, especially in an equity bear market. Differently said: don’t call yourself diversified if your portfolio consists of stocks and high yielding junk bonds. I gather that readers investing in such bonds think it doesn’t affect them; let me try to caution them that some master-limited partnership investments in the oil sector didn’t work out so well, either.

I have argued for some time that the main competitor to the price of gold is cash that pays a high real rate of return. That is, if investors get compensated for holding cash, they may not have the need for a brick that has no income and costs a bit to hold.

Continue reading What’s next for the Dollar, Gold & Stocks?

“Where the Wild Flowers Are”: Equity Funds See Largest Inflow in 13 Weeks Before Fed

By Heisenberg

There’s been no shortage of discussion this year about flows into US equities.

Over the past several weeks, more than a few commentators have suggested that the flood of Johnny–come–lately retail money into stocks may be proof that they do in fact “ring bells at the top.”

Of course these flows have been catalyzed and perpetuated by the “Trump trade” meme. Headlines advertising the “Trump rally” and Dow 20,000 have been plastered across every newspaper in the country, fueling retail demand and ensuring that as is almost always the case, “mom and pop” are buying when multiples are stretched and are thus almost sure to be underwater in the medium- to near-term as the market finally corrects.

Well, for those interested, below find a few charts from Deutsche Bank which, to borrow from Maurice Sendak, show you “where the wild flows are”…

Via Deutsche Bank

As shown below, US equity funds accumulated $55 billion of inflows over the past twelve months ( $100 billion since November alone)…


Last week, DM equity funds (+) with US & Japan (+) vs. Europe (-): DM equity funds rose to their highest level in the past 13 weeks (+0.2%, MFs: -0.1%, ETFs: +0.7%) as significant ETF inflows outweighed MF redemptions…



So as noted, those weekly flows were before the Fed.

It’ll be interesting to see what the lagged numbers look like this week.

DJI Oscillator Positive Index

By Tom McClellan

DJI Oscillator Positive Index

DJI Oscillator Positive Index
March 17, 2017

The DJIA itself might be hanging around all-time highs, but its components are telling a different story.  When a higher index high is made on declining participation, that’s a problem.

The indicator in this week’s chart is one I thought up about 20 years ago, one of a set of indicators that look at the 30 Dow stocks to see what they are doing.  This is a type of “diffusion index”, which describes an indicator that looks at the behaviors of each member of a group in order to generalize about the group.  All market breadth indicators are diffusion indices, for example.

In this case, the indicator is looking at the Price Oscillator for each of the 30 Dow stocks to see if they are above or below zero.  When we refer to our Price Oscillators, what we mean is an indicator calculated as the difference between the 10% Trend and 5% Trend (19-day and 39-day exponential moving averages, as some people call them) of closing prices.  This is the same math as we use for the McClellan A-D Oscillator, which uses the daily A-D difference as its raw data.  The Price Oscillator uses closing prices.  This is similar to the math involved in Gerald Appel’s MACD, which typically uses 12-day and 26-day EMAs.  Interestingly, Appel came up with that idea in 1969, the same year that my parents developed the math for the McClellan Oscillator (and independently from Appel).

Here is a Price Oscillator for General Electric, for example:

GE Price Oscillator

The DJI Oscillator Positive Index seems to follow the underlying trend of the market quite well.  That’s a nice property, especially since it is less noisy than the DJIA itself.  It is all the more valuable when it shows a change in that trend by crossing its own 15-day moving average.

That is the condition we have right now, with a slight down move for this indicator taking it below the 15MA.  It says the presumptive trend for the market right now is downward.

For the bigger picture, this indicator can also give useful messages about high and low extremes.  Here is a longer term chart:

DJI Oscillator Positive Index

When it gets to a true extreme, and especially when it shows a nice divergence relative to the DJIA, that can be a powerful message.  We do not have that sort of message now, just a more ordinary type of downturn that begs for a minor pullback, but not a major bear market.

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Chart In Focus Archive

“Quick, Buy That (Macro) Dip!”

By Heisenberg

Earlier today, we noted that the correlation between implied vol and equities is breaking down as traders buy cheap protection on expected surges/plunges while the market continues to grind ever higher.

As WSJ writes, “cash flooding in from private investors has pushed up the market overall, but has also led professionals to worry a little more about the risks—both of a meltdown and, conceivably, a ‘melt-up,’ when the market soars 10% or more in short order. The prospect of either big losses or big gains prompts buying of options, pushing up their cost, proxied by implied volatility.”


We also noted that when it comes to realized vol, January was the 5th calmest month on record and, to quote WSJ again, “the calm on the surface means it is cheaper than normal to hedge.” You can thank – in part – collapsing stock and sector correlations:



Well, when it comes to suppressed realized vol, we found the following chart from BofAML to be particularly interesting. Have a look at how quickly spikes in volatility have rapidly mean reverted during recent shock events like the US election and Brexit, versus history:


Consider that, and think back to the following from JPMorgan’s Marko Kolanovic:

Various quantitative and qualitative metrics indicate that markets have become more macro driven and react faster to the new information. A qualitative example shows the reaction time for recent major events (August ’15 selloff, Brexit, US Election, Italy Referendum) that has compressed from weeks to hours. Quantitatively, we are noticing a higher density of market turning points. The average variability of asset trends (averaged across major asset classes) that show turning points occurring at the fastest pace in recent history (~30 years).Given the engagement of central banks with markets and geopolitical developments, it should not be a surprise that markets are more macro driven.


In short: buy that f*cking (macro) dip. And right quick.

Fed Unlikely to Surprise Markets This Week

By Chris Ciovacco

Expectations High For Rate Hike

Markets do not like surprises. If the Fed raises interest rates at Wednesday’s FOMC meeting, it is not likely to be placed in the unexpected category. From The Financial Times:

“Investors are placing a near 100 per cent chance of a Federal Reserve interest rate hike later this month – the first tightening of monetary policy under the presidency of Donald Trump.”

Wednesday’s Fed extravaganza features a press conference and updated forecasts from FOMC members.

Rare And Rapid Shift In This Market Indicator

This week’s stock market video covers a rare shift that has only occurred a handful of times over the past 35 years.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video


Labor Report Checked Last Box

The Reuters consensus forecast heading into Friday’s monthly labor report called for a gain of 190,000 jobs. The report came in above expectations with a print of 235,000. From Reuters:

“Wall Street’s top banks were unanimous on the view the Federal Reserve will increase interest rates at its policy meeting next week following a stronger-than-forecast February U.S. payrolls report, a Reuters poll showed on Friday. “It ticks all the boxes for the Fed to move next week,” said Michael Hanson, chief U.S. macro strategist at TD Securities in New York.”

This is Why the “Pros” Are Short Small Caps but Long the S&P

By Heisenberg

Over the weekend, I said the following about the most recent CFTC data which showed specs going net short Russell 2000 minis versus increasing long S&P futs to the highest level since September:

I’ve noticed over the past couple of days that some commentators are cherry-picking the latest CFTC data which, as Bloomberg notes, shows that specs “turned outright bearish on small-cap stocks for the first time since the November election [as hedge funds] went net short Russell 2000 minis by 12k contracts on March 7, after cutting long positions for a 6th straight week.”

Is that evidence that the “pros” aren’t all-in on the equity bandwagon? Maybe. But probably not.

Because after all, that very same money is the most bullish on the S&P it’s been since September. That’s what I mean by “cherry-picking.”

What accounts for the disconnect? Well, if you ask me it’s people trying to fade the Trump trade (short small caps) while staying long the overall rally.

That’s so obvious as to be almost not worth mentioning, but apparently some folks were viewing the perceived discrepancy as some kind of warning sign about hedge funds’ outlook on stocks.

Now don’t get me wrong, I’m certainly not bullish on equities – I just thought it was worth pointing out that positioning is probably more a reflection of people trying to bet on an unwind of the Trump bump while maintaining exposure to the rally. Indeed, I said as much on Monday morning:

Well sure enough, SocGen is out saying pretty much the same thing. Consider the following as you think about positioning.

Via SocGen

Whilst the S&P 500 is only slightly off its recent all time highs, the smaller cap Russell 2000 performance is looking more problematic. The Russell 2000 was struggling prior to last year’s US election with many investors concerned by overvaluation, struggling profitability and excessively leveraged balance sheets. This attitude almost changed overnight with the index rocketing 20% higher in the weeks after the election of Donald Trump, propelled higher through a combination of bullish Trumpenomics expectations but also a fair amount of short covering. That the Russell 2000 is underperforming the S&P 500 is notable, particularly as it flies in the face of particularly strong small business survey data suggesting better times ahead. It is also worth noting that whilst 2107 EPS forecasts for S&P 500 earnings have barely budged this year, Russell 2000 2017 EPS expectations are down 4%, hardly a disaster but worth keeping an eye on. More broadly, for all the reflation talk EPS momentum remains largely uninspiring.


It’s a Snap

By Joseph Calhoun of Alhambra

Snapchat, a company that describes itself as a camera company yet makes no cameras, went public last week at a valuation of $24 billion. The company is growing fast, revenue up from $58 million to $405 million in just the last year. And as one publication put it, the company “earned” a loss of $514.6 million in the process. The company, in its SEC filing added:

We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.

Now, that’s boilerplate, butt covering language to warn anyone who might read the prospectus that they are buying into a speculative venture. Not that anyone actually reads prospectuses but they were certainly given the opportunity. Maybe it means something, maybe not. But nobody can claim in the future that they weren’t warned. Caveat emptor.

I don’t know if Snapchat will ever make any money. I’m not sure why they insist on calling themselves a camera company when their main business appears to be hosting short videos (or photos) that people send back and forth to each other. These videos are generally short (seconds not minutes) and disappear after a short time. The company does sell glasses – which it cutely calls spectacles – that allow you to record videos, sync and upload them to Snapchat. No, I don’t know why anyone would want to wear these ugly glasses. And no, I have no idea why anyone would want to record short videos that disappear. Well, actually I do. Snapchat was founded by three frat brothers as a sexting app. Which explains the disappearing act.

I won’t be buying Snapchat stock for our clients. Not because I don’t understand it or “get it” but rather because the idea of paying 60 times (80 times after day one of trading) revenue for a money losing company makes me more than a little nauseous. It is a pure speculation as the prospectus warns and you need to understand that if you are going to buy the stock. The chances of you ever collecting a dividend from profits is darn slim in my estimation so you will have to find a greater foo….um…investor to take it off your hands at a higher price if you are to profit from your speculation. Probably not a hard find in a market as hot as this one.  Another useless, time wasting social media stock might offer a template.  Twitter came public at $26 and peaked at nearly $75 a couple of months later. Now trading less than its IPO price, Twitter is still out there trying to make a buck. It hasn’t pulled that off in 10 years of trying but with a current market cap of $11 billion, hope obviously springs eternal. With the cash banked from the IPO, Snap, like Twitter, isn’t in any danger of running out of money anytime soon so the stock will be around but at what price? At some point they are going to have to figure out how to make money. And I see no evidence they have a clue how to do so.

Unlike another “camera” company that recently went public – GoPro (which I derided at the time of its IPO as a “camera on a stick”) – Snapchat has filed numerous patents – 46 in all I believe. But filing patents isn’t the same thing as enforcing them and we are talking about Silicon Valley here; patents are often nothing more than a coding problem. Instagram has already copied Snap pretty blatantly and Snap hasn’t lifted a finger to sue. Probably because they know they won’t win. Snap itself is the subject of a handful of patent and trademark infringement suits. And a Silicon Valley IPO wouldn’t be complete without the founders suing each other. One of the frat brothers sued the other two when they tried to cut him out of the deal. The settlement cost the company about $150 million. Chump change when you come public at $25 billion but probably says something about the maturity of the boys running the company.

Continue reading It’s a Snap

Stocks Post 35-Year Breakout

By Chris Ciovacco

Stocks Inside Box Since 1982

The Value Line Geometric Index is a broad, equally-weighted index that can be used to monitor the health of the stock market beyond the capitalization-weighted S&P 500.

As shown in the monthly chart below, the orange box acted as both support (green arrows) and resistance (red arrows) several times between 1982 and 2016. At the end of February 2017, the Value Line Geometric Index closed above the orange box; a potentially bullish development from a long-term perspective.

The concept of consolidation, or a rectangle, as outlined on StockCharts.com:

Rectangles represent a trading range that pits the bulls against the bears. As the price nears support, buyers step in and push the price higher. As the price nears resistance, bears take over and force the price lower. Nimble traders sometimes play these bounces by buying near support and selling near resistance. One group (bulls or bears) will exhaust itself and a winner will emerge when there is a breakout.

35 Years May Be Significant

From a longer-term perspective, if the breakout holds, the length of time the Value Line Geometric Index spent inside the box could be very significant. From StockCharts.com:

Generally, the longer the pattern, the more significant the breakout. A 3-month pattern might be expected to fulfill its breakout projection. However, a 6-month pattern might be expected to exceed its breakout target.

Reviewing The Breakout In Detail

This week’s stock market video covers two major developments, including the long-term breakout in the Value Line Geometric Index. The coverage of the Value Line Geometric Index begins at the 6:39 mark.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video


Time Will Tell If The Breakout Can Hold

Since breakouts can fail, we will not know the significance, or lack thereof, of the recent push above the orange box for several weeks or months. Breakouts are often retested, which also calls for an open mind in the coming weeks.

In terms of keeping an open mind about the breakout holding, other developments, including a turn in the True Strength Index and a Bollinger Band “price surge”, also lean bullish from a long-term perspective.

The “Trump Bump” Was in the Cards LONG Before Trump

By Elliott Wave International

[biiwii comment:  err, as we noted in July 2016… ]

How to breach limitations of conventional market forecasting

[Editor’s Note: The text version of the story is below.]

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It’s been a tough time for the stock market bears.

You just have to look at these recent headlines:

  • U.S. stock futures hit fresh highs (Marketwatch, Feb. 20)
  • Stocks post best winning streak in 25 years (CNN Money, Feb. 16)
  • Stocks Continue Record-Breaking Run (Nasdaq.com, Feb. 15)

As a result, a prominent Canadian market participant has thrown in the towel (zerohedge.com, Feb. 17):

The CEO of Fairfax Financial … announced that he is covering his firm’s equity hedges after suffering a $1.1 billion net loss on its investments in Q4, and $1.2 billion for all of 2016.

But the financial pain hardly ends there. Look at this chart with comments from the Wall Street Journal (Feb. 16):

It is the buzz of Wall Street: a five-day, 15% plunge in a U.S. mutual fund whose bearish bets were undone by the S&P 500’s latest run to fresh records.

Many market commentators say stocks have been rising because of the new administration’s policies (Yahoo Finance, Feb. 20):

Much of the post-US election rally in the stock market has been attributed to President Donald Trump’s promises for tax cuts and deregulation.

But long before the election, Elliott wave price patterns already told our subscribers to prepare for a market rally.

Our just-published February Elliott Wave Theorist reviews several charts we published early in 2016. Here’s one of those charts along with commentary from the new Elliott Wave Theorist:

The January and February 2016 issues of The Elliott Wave Theorist, written as stocks were plunging in highly volatile fashion, called for a bottom and labeled the stock indexes as having finished A, B and C of wave (4), a corrective formation dating back to the high of 2015.

In other words, our analysis revealed that the market was starting the next leg up.

This article was syndicated by Elliott Wave International and was originally published under the headline The “Trump Bump” Was in the Cards LONG Before Trump. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Get the Free Elliott Wave Tutorial

Learn how you can apply the Wave Principle to improve your trading and investing in this free 10-lesson tutorial. You’ll learn:

  • What the basic Elliott wave progression looks like
  • Difference between impulsive and corrective waves
  • How to estimate the length of waves
  • How Fibonacci numbers fit into wave analysis
  • Practical application tips for the method

Get Details and Instant Access