50+ Global Markets: Today’s Top Opportunities (free)

By Elliott Wave International

[biiwii comment: I just remembered that this event is starting today and wanted to put up a reminder for anyone interested in these extensive, premium services… free for a week.  Here is a screenshot of the real-time menu of items they have updated so far…]

ewi pro services

On Wednesday, April 12, Elliott Wave International is “opening the doors” to its entire line of trader-focused Pro Servicesfree for 7 days — during their Pro Services Open House.

EWI Pro Services bring you opportunity-rich, professional-grade forecasts for 50+ of the world’s top markets — many 24 hours a day, complete with Elliott-wave charts and precise forecasts.

On April 12-20, you’ll have free 24/7 access to forecasts from the following Pro Services:

  • Currency Pro Service (11 biggest FX pairs)
  • Stocks Pro Service (major indexes: U.S., Europe, Asia)
  • Metals Pro Service (gold, silver, industrial metals)
  • Energy Pro Service (crude, natgas, ETFs)
  • Interest Rates Pro Service (bonds: U.S., Europe, Asia)

Why are we “opening the doors”?

Before, the EWI’s Pro Services line was reserved mostly for institutional subscribers. Today, everyone can trade the same markets. Now you can experience the same professional-grade market forecasting — free for an entire week.

Chances are, Pro Services are like nothing you’ve experienced before.

Register now and you’ll also get:

  • Instant free access to a valuable Elliott wave trading resource
  • New subscriber-only videos and analyst interviews
  • Alerts via email as market action warrants
  • Free access to analysis and forecasts for 50+ of the world’s top markets

Join your fellow traders for 7 free days of forecasts now.

Q1: Sure Bets That Weren’t

By Doug Noland

Credit Bubble Bulletin: Q1: Sure Bets That Weren’t

An intriguing first quarter. The year began with bullish exuberance for the Trump policy agenda. With the GOP finally in control of Washington, there was now little in the way of healthcare reform, tax cuts/reform, infrastructure spending and a full-court press against regulation. As Q1 drew to a close, by most accounts our new Executive Branch is a mess – the old Washington swamp as stinky a morass as ever. And, in spite of it all, the global bull market marched on undeterred. Everyone’s still dancing. From my perspective, there’s confirmation that the risk market rally has been more about rampant global liquidity excess and speculative Market Dynamics than prospects for U.S. policy change.

It’s not as if market developments unfolded as anticipated. Key “Trump trades” stumbled – longs and shorts across various markets. The overly Crowded king dollar faltered, with the Dollar Index down 2.0% during Q1. The Mexican peso reversed course and ended the quarter up 10.6% versus the dollar, at the top of the global currency leaderboard. The Japanese yen – another popular short and a key funding instrument for global carry trades – jumped 5% . China’s renminbi gained 0.84% versus the dollar. WSJ headline: “A Soaring Dollar and Falling Yuan: The Sure Bets That Weren’t”

Shorting Treasuries was another Trump Trade Sure Bet That Wasn’t. And while 10-year yields jumped to a high of 2.63% on March 13, yields ended the quarter down six bps from yearend to 2.39%. Despite a less dovish Fed, a hike pushed forward to March, and even talk of shrinking the Federal Reserve’s balance sheet – bond yields were notably sticky. Corporate debt enjoyed a solid quarter. Investment grade bonds (LQD) gained 1.2% during the quarter, with high-yield (HYG) returning 2.3%.

The S&P500 gained 5.5% during Q1. And while most were positioned bullishly, I suspect many hedge funds (and fund managers generally) will be disappointed with Q1 performance. There was considerable Trump Trade enthusiasm for the higher beta small caps and broader market. Badly lagging the S&P500, it took a 2.3% rise in the final week of the quarter to see the small cap Russell 2000 rise 2.1% in Q1. The mid caps (MID) were only somewhat better, rising 3.6%.

Technology stocks had been low on the list of Trump Trades going into the quarter, perhaps helping to explain a gangbuster Q1 in the markets. The popular QQQ ETF (Nasdaq100) returned 12.0% during Q1. The Morgan Stanley High Tech index rose 13.5%, and the Semiconductors jumped 11.6%. The Biotechs (BTK) surged 16.0%.

A Trump Trade darling entering 2017, the financials struggled during Q1. March’s 4.0% decline reduced the bank stocks’ (BKX) Q1 gain to an unimpressive 0.3%. Somewhat lagging the S&P500, the broker/dealers (XBD) posted a 5.4% Q1 advance. The NYSE Financial Index gained 3.7%, while the Nasdaq Bank Index dropped 3.1%.

King dollar bullishness had investors underweight the emerging markets (EM) going into 2017. A weakening dollar coupled with huge January Chinese Credit growth helped spur a decent EM short squeeze. Outperformance then attracted the performance-chasing Crowd. By the end of March, EM (EEM up 12.5%) had enjoyed the best quarter in five years (from FT).

Continue reading Q1: Sure Bets That Weren’t

‘Real’ Performance Comparison

By Steve Saville

Inserted below is a chart that compares the long-term inflation-adjusted (IA) performances of several markets. This chart makes some interesting points, such as:

1) Market volatility increased dramatically in the early-1970s when the current monetary system was introduced. This shows that the generally higher levels of monetary inflation and the larger variations in the rate of monetary inflation that occurred after the official link to gold was abandoned didn’t only affect nominal prices. Real prices were affected in a big way and boom-bust oscillations were hugely amplified. As an aside, economists of the Keynesian School are oblivious to the swings in relative ‘real’ prices caused by monetary inflation and the depressing effects that these policy-induced price swings have on economic progress.

2) Commodities in general (the green line on the chart) experienced much smaller performance oscillations than the two ‘monetary’ commodities (gold and silver). This is consistent with my view that there aren’t really any long-term broad-based commodity bull markets, just gold bull markets driven by monetary distortions in which most commodities end up participating. The “commodity super-cycle” has always been a fictional story.

3) Apart from the Commodity Index (GNX), the markets and indices included in the chart have taken turns in leading the real performance comparison. The chart shows that gold and the Dow Industrials Index are the current leaders with nearly-identical percentage gains since the chart’s January-1959 starting point. Note, however, that if dividends were included, that is, if total returns were considered, the Dow would currently have a significant lead.

IAcomp_240316

Chart Notes:

a) I use a method of adjusting for the effects of US$ inflation that was first described in a 2010 article. This method isn’t reliable over periods of two years or less, but it should come close to reflecting reality over the long term.

b) To make it easier to compare relative performance, the January-1959 starting value of each of the markets included in the above chart was set to 100. In other words, the chart shows performance assuming that each market started at 100.

c) The monthly performance of the scaled IA silver price peaked at more than 2600 in early-1980, but for the sake of clarity the chart’s maximum Y-axis value was set to 1500. In other words, the chart doesn’t show the full extent of the early-1980 upward spike in the IA silver price.

d) The commodity index (the green line on the chart) uses CRB Index data up to 1992 and Goldman Sachs Spot Commodity Index (GNX) data thereafter.

Global Asset Allocation Update

By Joseph Calhoun of Alhambra

There is no change to the risk budget this month. For the moderate risk investor, the allocation between risk assets and bonds is unchanged at 50/50.

The Fed spent the last month forward guiding the market to the rate hike they implemented today. Interest rates, real and nominal, moved up in anticipation of a more aggressive Fed rate hiking cycle. Post meeting, a lot of the rise came out of the market. Nominal and real 10 year Treasury rates dropped by an identical 11 basis points on the day. Rates fell at the short end too as the yield curve shifted lower but didn’t flatten significantly. The market was looking for a big change in the Fed’s growth and inflation expectations and the dots basically didn’t move. Long term growth expectations are still 1.8-2.0% and inflation expectations were unchanged at 2.0% on the PCE deflator.

Just as or maybe more important was the emphasis in the statement on its “symmetric” inflation target. Rather than say, as they did in the last statement, that inflation was expected to “rise to 2% over the medium term”, the Fed now says “inflation will stabilize around 2%”. I know it seems like a minor change but what it means is that the Fed isn’t going to get too excited if the inflation rate goes above 2% for a period of time. They further emphasized the point by saying:

The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

What all the language changes mean is the Fed isn’t really shifting to a more hawkish stance and that rate hikes will not be coming fast and furious this year. The dot plot indicates the Fed still expects two more hikes this year. The market was starting to price in four (today’s plus two more) and that had to come out of the market after the meeting. This was the most dovish rate hike in the history of rate hikes. Greenspan’s old conundrum was that long term rates weren’t rising as the Fed hiked. The conundrum today is that even short term rates aren’t rising as the Fed hikes. Two year note yields are right back to where they were after the December rate hike.

The post-FOMC moves today were very beneficial for our allocation. Obviously, the move in bonds was beneficial as we are overweight bonds in our moderate risk portfolio. We also have more duration in our bond allocation than most firms; we are much more wary of credit risk than duration risk. The indirect consequence of today’s meeting was felt in currency and commodity markets which was also beneficial. The dollar index fell hard after the announcement as the difference in growth expectations between the US and Europe continue to narrow. That pushed gold and other commodities higher along with commodity sector stocks, all of which are represented in our portfolio.

Overall, our indicators haven’t changed enough to warrant any changes to the allocation. The yield curve sits in the middle of its historic range, providing us with little guidance. Credit spreads narrowed, then started widening again and finished up a bit wider than the last update. But it wasn’t enough to trigger any action. Earnings were up in Q4 and may even be able to get a third consecutive quarter of improvement in Q1 but stock prices have once again outpaced actual earnings growth. In other words, valuations in the US are still sky high. As I’ve stated many times over the last couple of years, ex-US stocks are much cheaper and that is still true. Momentum isn’t telling us a lot either, certainly nothing that warrants a change in allocation.

Continue reading Global Asset Allocation Update

“A Glaring Error of Omission”

By Heisenberg

VaR shocks. Taper tantrums.

I talk about such things a lot. And with good reason.

Investors have a discernible tendency to dismiss discussions of cross-asset correlations as if the subject should be confined to jet propulsion laboratories. All the while, these very same investors fail to see the connection between cross-asset correlations and the simplest of simple investing concepts: the 60/40 stock-bond portfolio.

If you understand why a 60/40 stock-bond portfolio works, then you’re a fan of negative stock/bond return correlations or, alternatively, positive rates/stock correlations. You just didn’t know it.

One of the most reliable market dynamics since the late 90s is the negative stock/bond return correlation.

correlations

(Goldman)

Indeed, the last several months (i.e. the post-election period) have shown, beyond a shadow of a doubt, that you need this correlation to be negative in a rising rate environment.

correlation2

(Goldman)

The main concern here is simple: if rates rise to far, too fast, equities may interpret that as a risk-off signal. If that happens, you get a positive stock/bond return correlation or, alternatively, a negative rates/stock correlation. Then everything sells off at the same time.

For more on this, consider the following out earlier this month from Moody’s.

Via Moody’s

The February 1 FOMC meeting minutes noted two interrelated developments. First, the narrowing by “corporate bond spreads for both investment- and speculative-grade firms” to widths that “were near the bottom of their ranges of the past several years.” Secondly, some FOMC members were struck by how “the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.”

Thus, some high-ranking Fed officials sense that market participants are excessively confident in the timely implementation of policy changes that boost after-tax profits. And they may be right, according to Treasury Secretary Steven Mnuchin’s recent comment that corporate tax reform legislation may not be passed until August 2017 at the earliest. The ongoing delay at remedying the Affordable Care Act warns of a possibly even longer wait for corporate tax reform and other fiscal stimulus measures.

Treasury bond yields declined in quick response to the increased likelihood of a longer wait for fiscal stimulus. Lower benchmark yields will lessen the equity market’s negative response to any downwardly revised outlook for after-tax profits. Provided that profits avoid a replay of their year-to-year contraction of the five quarters ended Q2-2016 and that interest rates do not jump, a deeper than -5% drop by the market value of US common stock should be avoided.

The importance of interest rates to a richly priced and supremely confident equity market cannot be overstated. In fact, the rationale for an unduly low VIX index found in the FOMC’s latest minutes contained a glaring error of omission. Inexplicably, no mention was made of how expectations of a mild and thus manageable rise by interest rates have helped to reduce the equity market’s perception of downside risk. An unexpectedly severe firming of Fed policy would doubtless send the VIX index higher in a hurry.

Add Another Uncomfortable First for Stocks

By Michael Ashton

The quantitative fact, and not the story, is what matters: stocks now no longer offer an expectation of return in excess of the risk-free return

It hasn’t happened yet, but it is about to.

Not since just before the financial crisis has the expected 10-year real return from stocks been below the 10-year TIPS yield. But with TIPS selling off and stocks rallying, the numbers are virtually the same: both stocks, and TIPS, have an expected real return of about 0.70% per annum for the next 10 years.

A quick word about my method is appropriate because some analysts will consider this spread to already be negative. I use a method similar to that used by Arnott, Grantham, and other well-known ‘value’ investors: I add the dividend yield for equities to an estimate of long-run real economic growth, and then assume that cyclical multiples pull two-thirds of the way back to the long-run value, over ten years. (By comparison, Grantham assumes that multiples fully mean-revert, over seven years, so he will see stocks as even more expensive than I do – but the important point is that the method doesn’t change over time).

Somewhat trickier is the calculation of 10-year real yields before 1997, when TIPS were first issued. But we have a way to do that as well – a method much better than the old-fashioned approach of taking current ten-year yields and subtracting trailing 1-year inflation (used by many notables, including such names as Fama). That only matters because the chart I am about to show goes back to 1956, and so I know someone would ask where I got 10 year real yields prior to 1997.

The chart below (Source: Enduring Investments) shows the “real equity premium” – the expected real return of stocks, compared to the true risk-free asset at a 10-year horizon: 10-year TIPS.

realequityprem

The good news is that in this sense, stocks are not as expensive relatively as they were in the late 1990s, nor as expensive (although much closer) relatively as they were prior to the global financial crisis. Nor even as they were (although even closer) just prior to the 1987 stock market crash. Yay.

Continue reading Add Another Uncomfortable First for Stocks

Bonds Outside Norms Dating Back Over 500 Years

By Chris Ciovacco

The stock market has seen various forms of extremely rare behavior over the past three years. The bond market has also checked some very, very rare boxes recently. From Bloomberg:

Today’s bond market is defying just about every comparison known to man. Never before have traders paid so much to own trillions of dollars in debt and gotten so little in return. Jack Malvey, one of the most-respected figures in the bond market, went back as far as 1871 and couldn’t find a time when global yields were even close to today’s lows. Bill Gross went even further, tweeting that they’re now the lowest in “500 years of recorded history.” Lackluster global growth, negative interest rates and extraordinary buying from central banks have all kept government debt in demand, even as yields on more than $8 trillion of the bonds dip below zero.

Last Week’s Intraweek Stock Reversal Muddies Bullish Waters

On Wednesday, June 8, the S&P 500 was up 20 points for the trading week that began on Monday, June 6. By the time the closing bell came on Friday, June 10, the S&P had given back all its gains for the week, finishing the 5-day frame down 6 points. This week’s video covers numerous markets that have yet to “prove it” from a bullish perspective.

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

Video

Odd Market Behavior Calls For Flexibility

The S&P 500 ETF (SPY) dropped sharply last week on well-above average volume. Even in that context, according to J. Lyons Fund Management, “smart money” commercial bond traders have placed the largest bearish bet in eighteen years on defensive bonds. Economic data has been mixed in recent weeks, adding to the need to remain open to the bullish and bearish case for equities. With a Fed statement coming Wednesday and numerous economic releases (PPI, industrial production, CPI, housing starts, etc.), the market will have plenty to assist with bullish and bearish choices.

The bullish case for stocks would greatly improve with a sustainable and confident move above 2,134 on the S&P 500 Index. Confidence can be measured via ETF leadership, market breadth, and trading volume.

Pro Services Free Week

By Elliott Wave International

Starting at 9 a.m. ET Wednesday, April 20, Elliott Wave International is “opening the doors” to the entire line of trader-focused Pro Servicesfree for 7 days — during: Pro Services Open House.

EWI Pro Services bring you opportunity-rich, professional-grade forecasts for 50+ of the world’s top markets — many 24 hours a day, complete with Elliott-wave charts and precise forecasts.

On April 20-27, you’ll have free 24/7 access to forecasts from the following Pro Services:

  • Currency Pro Service (11 biggest FX pairs)
  • Stocks Pro Service (major indexes: U.S., Europe, Asia)
  • Metals Pro Service (gold, silver, industrial metals)
  • Energy Pro Service (crude, natgas, ETFs)
  • Interest Rates Pro Service (bonds: U.S., Europe, Asia)

Why are we “opening the doors”?

Before, the EWI Pro Services line was reserved mostly for institutional subscribers. Today, everyone can trade the same markets. Now you can experience the same professional-grade market forecasting — free for an entire week.

Chances are, Pro Services are like nothing you’ve experienced before.

Register now and you’ll also get:

  • Instant free access to a valuable Elliott wave trading resource
  • New subscriber-only videos and analyst interviews
  • Alerts via email as market action warrants
  • Free access to analysis and forecasts for 50+ of the world’s top markets

Join your fellow Elliott wave traders for 7 free days of forecasts now.