Negative divergences

Author Cam Hui

Posted: 06 May 2013

Further to my last post (see Sell in May?) I am seeing more negative divergences that create more concerns for the bull case. The recent rally, which has been led by the golds and deep cyclicals, have all the appearances of a dead cat bounce rather than the start of a sustainable advance.

Last week, I suggested that traders should watch the silver/gold ratio for signs of a sustainable rally (see Watch silver for the bottom in gold). The idea was that silver, being the more volatile poor man’s gold, should display positive relative strength against gold and lead a precious metal rally if these metals are in the process of making a sustainable bottom. Look at what’s happened to the silver/gold ratio since then:

We can see how the oversold rally developed by analyzing the price charts of the gold and silver ETFs. GLD has certainly staged a classic capitulation and rally pattern to fill in the gap left by its recent freefall:

But what about silver? Sure, this poor man’s gold rallied, but the rebound has been weak and the gap was not filled, which suggests to me that this advance is an oversold rally and the next major move in precious metals is likely to be down.

As confirmation of the bearish commodity trend, the entire industrial metals complex remains weak despite the rebound in gold and oil:

In my previous post, I also wrote about watching the AUDCAD currency cross rate, with the premise that the Australian Dollar is more sensitive to growth in China and the Canadian Dollar is more sensitive to growth in the American economy. A breach of the uptrend in this cross rate would would be a signal that the market’s belief that Chinese growth is slowing, which would be negative for the global growth outlook. The breakdown in this currency pair cannot be regarded as good news for the prospects of Chinese growth.

Another concern is the disappointing South Korean April exports, which were just released and missed expectations at 0.4% compared to estimates of 2.0%. The South Korean economy is regarded as cyclically sensitive as the country is highly exposed to trade with China and Japan.

In addition, Cullen Roche at Pragmatic Capitalism recently pointed out that the Citigroup Economic Surprise Index is turning down in every major region in the world. As a reminder, a economic surprise index reading below zero is indicative of more misses than beats on economic data. Falling surprise indices around the world suggests, therefore, that global economic growth is starting to stall.

As we wait for the decisions of the Federal Reserve and ECB this week, it will be a test of market psychology of whether bad news is good news, i.e. economic slowdown will lead to central bank stimulus, which is bullish, or bad news is bad news.

Non-confirmation of SPX new highs
Moreover, with the SPX making new marginal highs, I am not seeing the breadth confirmations from the 52-week highs and lows. While these kinds of breadth divergences can last for months, it nevertheless raises a red flag about the sustainability of this stock market rally.

Here’s another puzzle. If the stock market is making new highs, why is the VIX/VXV ratio (which I described in a previous post here and first pioneered by Bill Luby, see his original post) sitting at only 0.91, which is barely below my “sell signal” mark of 0.92? What is the term structure of the option market telling us?

This is not investment advice
One final point. I have outlined a number of negative divergences that suggest a bearish tone for stocks, but I have not outlined the timing of any trades. In my last post entitled Sell in May? I sketched out a number of likely triggers for to get more defensive. Since then, I have had a number of emails and other responses asking if and when I would write about when those events are triggered and, by extension, when it’s time to sell or short the market.

Let me make this very, very clear: Those triggers are just a set of suggested triggers. It will be up to each individual reader to make up his or her own mind as to what to do if and when each event is triggered. Don’t expect me to hold your hand and shout “sell” for you. You are responsible for your own portfolio and your own profit and loss statement.

For the readers who are waiting for me to tell when to buy or sell, I strongly suggest that you re-read my previous post about why the contents of this blog does not represent investment advice. This blog is a forum for discourse, not pre-digested investment or trading advice.

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.


A Notable Reversal Day

Author Larry Berman

Posted: 9 Aug 2012 re-posted from etfcm

Just as the TSX looks like it can exceed recent highs, we see a notable reversal day. In this case, a good open near the highs of the day and a close at the low of the day reversing most of the previous day’s advance. Recall the bulk of Tuesday’s advance happened during the holiday Monday, so Tuesday’s gains in the TSX were mostly playing catch up. So like we have seen for the past few months, the TSX probably drifts back towards the trend of recent rising lows. Nothing to worry about in the grand scheme at this point, just more trading noise.

The most notable reversal was in the overbought energy sector. Our view is WTI has no business being at $95 when supply and demand fundamentals point to $85 as a reasonable average price given subpar growth for the next few years coupled with increasing domestic supply. The insurers are reporting sloppy earnings and banks are not going to be any better. The TSX remains stuck in the mud for a while.


Nat Gas Stocks Remain Relatively Cheap

Author Larry Berman

Posted: 7 Aug 2012 re-posted from etfcm

The S&P TSX should play a little catch up today and it is clear that the price action in the past few months has been confusing to say the very least. We expect more choppy markets in the coming months with crude oil leading to most of the choppiness, and gold adding to that theme as well. In the next few months, we are sellers above 12,000 and buyers below 11,400 and see little scope for a strong move beyond either side of that range.

Nat gas stocks remain the relatively cheapest part of the TSX and make some sense for investors to accumulate on weakness in the coming months. We do not see a robust recovery for a while, but the longer-term risk reward is compelling in the sector. The fact that they have not moved much and nat gas has bounced from the $2 area, suggests that the market does not believe just yet.


Gold Equities Likely Disappointed Today

Author Larry Berman

Posted: 1 Aug 2012 re-posted from etfcm

If historical patterns repeat, and we know they do, gold equities are likely to be disappointed for a few days following the FOMC not adding more QE today. Although most economists surveyed think they will add more QE at some point, the Bernanke has clearly stated that they want to see things get a bit worse before they act.

World oil process weakened again yesterday as WTI struggles to hold above $90 while the XEG put in a notable bearish reversal pattern, perhaps capping the near-term upside for the TSX. If gold and energy look weaker, it is hard for the TSX overall to do much on the upside.


Doubtful the Fed will Make a Move Next Week

Author Larry Berman

Posted: 30 July 2012 re-posted from etfcm

As speculation mounts over another few trillion of debt purchases globally, the gold seasonal trade may have its day in the sun. We doubt the Fed has any more information next week than they did last meeting or in Bernanke’s recent testimonies to suggest the Fed moves next week. To be sure, they “stand ready,” but we already know that. If the Fed rolls the dice now and it does not work (because is can’t), then next year when the US fiscal cliff presents itself and the Clowns in Washington cannot get their act together again, just a dab won’t do ya. So they need to save the bazooka for the cliff.

All the metrics that Bernanke has mentioned as a trigger, namely inflation expectations as measured by breakeven spreads between inflation indexed bonds and nominal bonds, is still North of 2% and not anywhere near previous trigger points—though heading in that direction. Anyone looking for it next week is likely to be disappointed. That rush of post announcement selling might be the next best buying opportunity for the TSX and gold stocks.

TSX Exhibiting Bottoming Behaviour

Author Larry Berman

Posted: 25 July 2012 re-posted from etfcm

The TSX tried to pull off a reversal day after dipping below the 200-day on a bounce back in energy and financials. The TSX is clearly exhibiting bottoming behaviour, but the outlook as we see it is still unlikely to generate much more than another bounce while the risks of a lower low and retest of the 2011 lows is growing, as the US market stumbles and European banks head for new lows as well.

The fact that the energy sector cannot generate a material rally despite the potential for M&A and the recent $15 rally in WTI speaks volumes about the underlying confidence in the market. It does also suggest that people are underinvested in cyclicals and that when the catalyst is a good one, the markets can put in a good rally.

Promise of more QE if needed from the Fed is not enough for the precious metals at this point, but the seasonals are now positive, so a bottom is likely near. We could see one more head fake to the downside before an explosive rally.


The Magnitude of Deleveraging and Fiat Currency System

Author Larry Berman

Posted: 25 July 2012 re-posted from etfcm

The bond markets of the world are telling us all is not well. Very few investors understand the magnitude of the deleveraging that is needed combined with the loss of confidence in the fiat currency system. While quantitative easing (basically printing money to buy outstanding bonds) is more politically palatable than the austerity being forced on Europe’s peripheral economies, it ultimately undermines confidence and is not sustainable.

As Stephanie Pomboy articulated very well in Barron’s this week; it probably ends with the world going back to some sort of gold backed system. This probably takes years to play out and it will not be until governments hit bottom and all bullets in the Fed’s arsenal are used that this eventuality plays out. In the mean time, nothing short of strong economic growth un-aided by governments will normalize the bond markets.


TSX Trading Cycle Remains Positive

Author Larry Berman

Posted: 19 July 2012 re-posted from etfcm

The trading cycle for the TSX remains positive, which means traders should be in a buy dips mode. However, the relative cycle confirms that the TSX is still one of the weaker markets in the world. All will know that for the TSX to perform well it needs energy, golds, and base metals to perform well. Over the past few months, these stocks have been decimated.

There is little doubt that the TSX is quite oversold relative to other markets in the world, but in the very short run, it continues to lack a material bullish catalyst. Even the recent strength in WTI crude oil bouncing from $78 to $89, and nat gas from a dip below $2 to coming close to $3, has not managed to excite investors. Seasonals for gold stocks turn up for the next six months, which should help significantly, but there is little clarity in energy where the fundamentals remain soft at best.

Dominating Chart Patterns Suggest the Cycle is Failing

Author Larry Berman

Posted: 12 July 2012 re-posted from etfcm

The earnings pre-announcements are clearly having an impact on the S&P 500′s investor psychology. The developing dominating chart patterns at this point, nearly three and one half years into a stimulus induced “economic recovery” with very little natural momentum, suggest that the cycle is failing and that recession is a growing risk. Odds are increasing that with the fiscal cliff overhanging the Presidential elections, while we could see a more traditional rally into the election, the flip side of the trade could be increasingly volatile on the downside.

For now, a dip below the 200-day average is likely the next best buying opportunity and we have our powder pretty dry for that. It seems increasingly unlikely that we see sustainable new highs with the global economy slowing so rapidly. True, we are seeing stimulus measures, but increasingly they are having a muted impact.

Gold and WTI Rally While Gold and Energy Stocks Decline

Author Larry Berman

Posted: 10 July 2012 re-posted from etfcm

It’s never a good day when WTI rallies and energy stocks decline. It’s never a good day when gold rallies and gold stocks decline. Investors should get used to it. We had a caller on the show yesterday asking about the disconnect between gold and gold stocks. This is indeed one of the major conundrums of the TSX and while we are confident gold’s longer-term trend is up, gold stocks have not made any money as a group for the past 5 years, as measure by the XGD, and are down about 30% from recent peaks. We also know that the sector valuations are near the low-end of a two decade range, so there should be some fundamental value players stepping up during the second half of the year when earnings are more favourable.

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