The Only Strong Commodity Sectors at Present are in Energy


Author Larry Berman

Posted: 12 Mar 2012 reposted from etfcm

There appears to be a base pattern developing in the broad DJP commodity indices, but the steeper contango seen in many commodities is taking a toll on the buy and hold commodity investor. The only sectors that look strong at this point are in the energy sector (except natural gas), which has become so cheap by historical standards it is actually compelling.

Natural gas equities as measured by FCG is still not as cheap as one would expect given the price of the underlying. ECA, the pure natural gas play is developing a major base pattern and looks compelling to accumulate on weakness. We do however expect significant disappointment during the next earnings period on the gassy energy stocks.

Copper looks to be struggling and industry leader FCX is clearly showing very poor behaviour after it failed breakout over its 200-day average. Agricultural stocks within MOO, also look to be undergoing more corrective price action that probably has 5-10% downside before it is attractive.

Why I am still bullish (II)


Author Cam Hui

Posted: 06 Mar 2012

I got a fair amount of feedback and pushback on my last post (see Why I am still bullish). Most have pointed to contrarian sentiment indicators, such as the Rydex Bull/Bear ratio, showing that traders are excessively bullish on stocks.

The Do’s and Don’ts of sentiment models
Let’s go back to first principles on sentiment models. The basic assumption behind sentiment models is that if a certain group is in a crowded long position, then there is little or no buying power to push the market up further. I said in my last post that both individuals and institutions are in no way overweight equities relative to historical experience. Institutional fund flows into stocks have barely begun, which provides sustainable buying power. Individual investors have been selling out of equity mutual funds and funds flows barely turned positive. Are those signs for you to run for the hills?

Such conditions set up the possibility that we can experience a series of readings that show too many bulls in sentiment models, which are shown in red in the chart above, during a rally where the market advances steadily such as the QE2 stock market rally that began in late 2010. At the same time, technicians could see a series of “good overbought conditions” as the market grinds higher.

For traders, sentiment models can be notoriously fickle. Since the Dow first kissed the 13K level and pulled back, some measures of sentiment have seen bullishness drop significantly. In fact, the latest Bespoke survey, which is admittedly unscientific, shows more bears than bulls and we have seen similar levels of waning bullishness amongst the respondents of other surveys.

A case of bad breadth? Or just a “good” Apple?
Another knock against the bullish outlook are the negative divergences seen in the markets. The Dow Jones Transportation Average has lagged. But as Mark Hulbert pointed out, there has been disagreement among Dow Theorists about the significance of that divergence.

Other technical analysts have pointed to the poor relative performance of small cap stocks. It is said that when large caps lead the market, it is a sign of faltering leadership, i.e. the generals are leading but the troops aren’t following.

Are small caps truly faltering, or is is just the case of a large cap rocketship – in this case Apple?

The chart below shows the relative performance of the small cap IWM against the large cap SPY. The relative performance of small caps against large caps broke down in late February by violating a relative uptrend that began in October (shown in green) and at the same time broke down against a relative support level (shown in blue). Now consider the relative performance of IWM against EWI, which represents an equal-weighted S+P 500 and largely neutralizes the effects of Apple’s rally, shown on the bottom panel. Note that small caps remain in a relative uptrend against large caps. How much of the relative breakdown is due to the capitalization effect of Apple?

You can see the same effect more dramatically when we compare the relative performance of the NASDAQ Composite against the NASDAQ 100. Similarly, the small cap NASDAQ Composite broke down in late February against the mega-cap NASDAQ 100. However, the bottom panel shows that the NASDAQ Composite remains in a relative uptrend against the equal-weighted NASDAQ 100.

A correction is possible but not inevitable
So where does that leave us? If you are an investor, the intermediate term trend is still up (note that Warren Buffett recently expressed his bullishness). I would be inclined to stay long and ride out any short-term choppiness.

If you are a trader, you have to be prepared for a correction, which may or may not occur. In some ways a correction is overdue because stocks have been rising steadily this year without a single day where the market has fallen 1%. On the other hand, you also have to be prepared for the possibility that there is no correction and the market grinds upwards while undergoing a series of “good overbought conditions” until individual and institutions have fully loaded up on equities.

Even if a correction were to appear, it would likely be mild. The first support level for the S+P 500 would be the 50-day moving average, which is 3-4% below current levels. In this video, Jeffrey Hirsch, of the Stock Traders Almanac, believes that the market is likely to see a mild correction in the second half of March but would view that as a opportunity to deploy more cash. He then expects the markets to continue to rally until year-end.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Why I am still bullish


Author Cam Hui

Posted: 05 Mar 2012

As the stock market consolidates and the Dow flirts with the 13K level, there have been some calls for an intermediate term top. I remain bullish over the next few months for the following reasons:

  • The risk trade bull run remains intact
  • Positive funds flow are buoying the markets;
  • Panic levels are still elevated;
  • “Expert opinion, defined as the better market timers, are bullish;
  • The Bernanke Put and Draghi Put still lives; and
  • The China property bubble lives on for another day.

The risk-on trade is still “on”

If you were to view the stock market through the lens of the risk-on/risk-off trade, then the risk-on bull move remains intact. Consider this chart of the relative performance of SPY against IEF, which shows a short-term relative uptrend in the context of an intermediate term uptrend.

Positive funds flows
Josh Brown pointed to a Reuters article indicating that institutional equity funds flows are positive. He went to say that they are likely to continue:

In my experience, these types of raising and lowering equity exposure cycles take place at a glacial pace and they rarely turn or stop on a dime.

Scott Grannis wrote that individual investor equity funds flows are just starting to turn positive and there is a lot of room for them to go further into stocks:

…and out of bonds, whose flows are still positive:

Grannis’ conclusion was:

Adding it all up, I would say that we are a long way from seeing over-priced equities. Let’s wait to see many months or even a few years of inflows to equity funds before concluding that the guy on the street is too bullish.

Panic levels are still elevated
Also consider the readings of the Crash Confidence Index from the Yale School of Management. A low level indicates a high level of fear and a high level indicates a high level of complacency. While the ECB’s LTRO program has largely taken the risks of a banking meltdown off the table, investors confidence remain low and fear levels are still elevated. I interpret these conditions as being contrarian bullish.

“Expert” opinion is bullish
Mark Hulbert reports that the best market timers are leaning bullish, while the worst market timers are leaning bearish.

As an example, I don’t know where the Aden sisters are in Hulbert’s ratings, but I have tremendous respect for them and they are bullish. I have followed them, off and on, since the late 1970’s during the gold mania that took bullion up to its peak of $850 in 1980, which they correctly called. Unlike other gold bugs, they turned bearish on gold and turned bullish on equities in the intervening period. They correctly called the rebirth of the commodity bull about ten years ago.

The Bernanke and Draghi Puts still lives
Ben Bernanke, in his testimony to Congress last week, said in so many words that QE3 isn’t a done deal and they are watching the data carefully.

In light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however, it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.

The markets sold off but the flip side of this coin is that they are ready to act should the economy weaken.

The dual objectives of price stability and maximum employment are generally complementary. Indeed, at present, with the unemployment rate elevated and the inflation outlook subdued, the Committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives.

So does that mean that good economic news is good news for the markets but bad news isn’t necessarily bad news?

As for the ECB, interbank lending in Europe is still seized up. This analysis shows that the European banking system needs another four LTROs to get through to 2013. Don’t be surprised if the ECB announces further rounds of LTRO.

In short, the Bernanke and Draghi Puts will “put” a floor on the stock market for now.

The Chinese property bubble lives on another day
Walter Kurtz, writing at Pragmatic Capitalism, noted that the property market in Beijing and Shanghai are recovering. Such a development should forestall any immediate concerns about a crash in the Chinese property bubble as official actions have kicked the can down the road and delayed the day of reckoning yet once more.

The Shanghai Composite has responded with a rally as a result of these measures. As the chart below shows, the index has rallied through a downtrend line and it has not even approached the first Fibonacci retracement level, which would serve as a resistance level.

Bearish tripwires
To be sure, not every market forecast is correct. Here is some of what I am watching for to see whether the bears are wrestling control of this market away from the bulls. These are some important questions that need to be answered in order to determine the next major move in equities.

First and foremost, the big question is can the Dow can overcome the 13K mark?

Looking at foreign markets, can the Hang Seng overcome resistance after rallying to fill the gap depicted in the graph below?

What about Europe? The Euro STOXX 50 appears to be undergoing a sideways consolidation. Can it rally to overcome resistance?

The cyclically sensitive Australian Dollar is temporary stuck in a trading range. Will it break out to the upside, which is bullish, or to the downside, which is bearish?

Another important cyclical indicator is the relative performance of the Morgan Stanley Cyclical Index against the market. Cyclicals started 2012 on a tear, but they have begun to consolidate sideways on a relative basis. Can the relative support level hold?

Lastly, technicians have been sounding words of caution because the Dow Transports have been lagging and have not confirmed the advance of the Industrials Average. Mark Hulbert writes that there is some disagreement about prominent Dow Theorists about the significance of this divergence:

Frustratingly, not all Dow Theorists agree on an answer. In fact, two of the three monitored by the Hulbert Financial Digest — Jack Schannep of TheDowtheory.com and Richard Moroney of Dow Theory Forecasts — think the appropriate point of comparison is not last summer but late October. And because, near the end of December, the Dow averages rose above their late-October highs, both Schannep and Moroney believe that the Dow Theory is solidly in the bullish camp — notwithstanding where the Dow transports might be relative to their July high.

In contrast, Richard Russell, editor of Dow Theory Letters, says he’s worried about the Dow transports’ weakness and, in part for that reason, is largely out of the stock market.

The chart below shows the relative performance of the Dow Jones Transports against the Dow Industrials. If relative performance were to fall below the 38% Fibonacci retracement support level, it would mean that the bears have taken control of the market.

In conclusion, I believe that equities are consolidating their gains but remain in an intermediate bull phase. During this consolidation period, doubts will appear about the legitimacy of the bull leg, as they are now. My view is that the next major move is up, but I am watching and open to the possibility that I am wrong and a correction can run deeper than I expect.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Breakout or consolidation?


Author Cam Hui

Posted: 19 Feb 2012

On Friday, the Dow Jones Industrials Average staged an upside breakout to a new recovery high. The move was confirmed by the large cap OEX, but not by many other averages.

The S+P 500, for example, is still struggling with resistance. The intermediate term trend, however, appears bullish as it is in a well-defined uptrend and there are signs of global healing from stock indices around the world. In my mind, there is no question that the bulls are in control of this market in the intermediate term. The more relevant question is whether they have exhausted themselves in the short-term. Can the S+P 500 clear resistance or are we due for a period of consolidation?

More disturbing for the bulls is the narrowing leadership of this rally as it has been led by the large cap stocks. Small caps have not been as strong, which is a bearish negative divergence. As shown below, the small cap Russell 2000 is barely approaching its resistance zone, though it is in a similar well-defined uptrend.

Cylicals say consolidation
To discern the future direction of equities, I turn to the answer from three place. I analyzed the chart patterns of the cyclicals, as well as the other two sources of macro risk, Europe and China. Consider the Morgan Stanley Cyclicals Index. These stocks staged an upside breakout in mid-January, but have started to consolidate as they moved sideways through the uptrend line.

Other cyclically sensitive indices and currencies, such as the Australian Dollar, the Australian All-Ords, the Canadian Dollar and the TSX Index all show a pattern of breakout and consolidation.

Commodity prices, on other hand, have lagged this rally. They broke out of a downtrend in mid-January and they appear to be consolidating. I am watching to see if the sideways pattern continues or if they can stage an upside breakout through resistance.

Are fundamentals improving?
Josh Brown puts the bull and bear debate into perspective this way:

I’m convinced that the single most important decision facing asset allocators right now is whether or not to join The Big Shift or to ignore it and ride it out. Guys like me need to decide if we’re going to dance with the sinners in the high-beta, risk-on sectors that have been leading this market or stick with the saints – the defensive, income-heavy non-cyclicals that saved our lives when things got dicey last year.

He went on to say that equity prices may have gotten ahead of fundamental [emphasis added]:

The trouble with this is that while we may yet be able to avoid another recession scare this year, the data simply does not confirm (just yet) what the homebuilders, banks, casinos, REITs and materials stocks would have us believe. Instead, I think we’re witnessing a major rotation, one of the biggest I’ve ever seen, and that it cannot get much further until the data on housing and jobs improves markedly and materially.

Have the fundamentals improved? Well, sort of. On the earnings side, things are improving as reporting season progresses. Thomson-Reuters reports that the “beat rate” for companies have been steadily getting better.

Corporate guidance, while negative, has been improving as well [emphasis added]:

Looking ahead to the next earnings season, in which companies will give investors a glimpse of how they are faring in the early months of 2012, the number of companies offering downbeat guidance continues to exceed those steering analysts’ forecasts higher. So far, 52 companies in the S+P 500 have issued negative earning guidance compared to 20 that have issued positive earnings guidance for the first quarter of 2012; the resulting ratio of negative to positive preannouncements is 2.6. While that’s still not telling investors that corporate executives are bullish, it’s a significantly more positive reading than the N/P ration of 3.6 observed as recently as last week.

Watch overseas markets
The other important “tell” of market direction are Europe and China, which are the two big sources of macro risk. I am watching closely the action of the Euro STOXX 50, which has staged an upside breakout, but it isn’t clear whether the breakout will hold. (With the ECB about to unleash LTRO2 that is expected unleash over €600b of liquidity to the eurozone banking system, does anyone want to bet against a breakout?)

Moving east, I pointed out last week that the Shanghai Composite had rallied through a downtrend line. That development had alleviated my concerns of China as a source of tail risk and signaled that a hard landing is less likely. Indeed, China has cut bank reserves another 50 basis points as it followed suit on a trend of global monetary easing by the BoJ and BoE.

Next door in Hong Kong, the Hang Seng Index has rallied to fill a downside gap and is encountering overhead resistance. I am watching carefully to see if the bulls can stage a rally to overcome resistance.

Where to next?
Is this a period of breakout or consolidation? My inner investor tells me to stay with the bull trend in equities as they are in a well-defined uptrend. Moreover, a glance at the 30-year Treasury yield shows that it is forming a saucer bottom pattern, indicating that the risk-off trade is on its last legs.

My inner trader, on the other hand, is more agnostic on the question of breakout or consolidation. On one hand, he is aware that the combination of under-invested equity investors and bullish sentiment can  lead to  a series of “good overbought” conditions that result in higher prices. On the other hand, the markets are overbought and they are ripe for a pullback and he is watching market conditions carefully next week for signs which way the markets break.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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