Will the bears get their second wind?


Author Cam Hui

Posted: 26 Feb 2013

The weakness in equities last week was no surprise to me – though the trigger of the adverse liquidity effect the Fed removing QE was. As I reviewed the charts on the weekend, it became apparent to me that this week coming up could turn out to be pivotal in the tug-of-war between the bulls and bears.

Right now, it’s not clear to me whether the weakness last week will turn out to be a shallow correction or a much deeper one.

Cyclical stocks rolling over
As I documented last week (see Take some chips off the table) cyclically sensitive stocks are rolling over relative to the market. A review of some of the major sectors of the US stock market shows this to be the case. Consumer Discretionary stocks have violated an important relative uptrend against the market.

Cyclically sensitive Industrials can only be charitably characterized as testing a relative uptrend line:

The equal-weighted NASDAQ 100 as a proxy for Technology stocks, which minimizes the effect of heavyweight Apple, has violated a relative support level after rolling over out of a relative uptrend. (Believe me, the relative chart of Tech with Apple is much, much worse.)

The homebuilders, which had been a source of leadership and relative strength, are rolling over relative to the market:

Emerging defensive leadership?
Meanwhile, defensive sectors are rising in relative performance and they appear to be emerging as market leaders. Consider, for example, Consumer Staples:

…and Utilities:

A key test for the bulls and bears
The way I read it, cyclically sensitive stocks are faltering. Defensive sectors are rallying but have not fully assume the mantle of market leadership. This week coming up is a key test for bulls and bears alike.

Can the bulls regain the mojo? Can the bears get a second wind?

While I am leaning slightly bearish because of negative technical conditions (see J.C. Parets’ analysis on negative divergences and the signal from insider selling), I have to respect the upside potential posed by a couple of major market moving events this week.

First, there is the Italian election, where Silvio Berlusconi is attempting a comeback on an anti-euro platform (see this discussion by Joe Wiesenthal of Business Insider on the mechanics of Italian elections). A win by Berlusconi or a deadlocked government could really spook the markets.

The other is the looming sequestration cutbacks scheduled to take place on March 1. Based on the experience of the recent past, it seems that the markets have an ingrained Pavlovian response that there will be a last minute deal and remain relatively complacent about the outcome. I could go on and on about how to analyze the politics of sequestration, but I have no idea of the outcome.

I just know one thing for certain, we will have volatility.

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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Bernanke is Clear on Triggers for QE3, and We Aren’t Close to Them


Author Larry Berman

Posted: 26 Mar 2012 reposted from etfcm

This week’s educational segment on BNN’s Berman’s Call is focused on understanding some aspects of market breadth. For the car enthusiasts out there (I just got my new Audi A5 cabriolet), understanding market breadth is like looking under the hood to get a sense of what might go wrong in the future. Looking at all the gunk in the carburetor for example can tell you about the efficiency of your engine. In the case of a stock market index like the S&P 500 or NASDAQ 100, we can look under the hood in many ways.

One that was developed by our good friend Tom McClellan of the McClellan Oscillator, http://www.mcoscillator.com/, averages the amount that all stocks in an index are below their 52-week highs. The NASDAQ 100 as all will know, led by AAPL and a hand full of other stocks, has been making new highs, but the average stock in the index is still more than 10% below its own 52 week high. We can see that when divergence build in this indicator, as we have seen over the past market cycles, a significant market correction typically follows.

The current internal weakness in the NASDAQ 100 is the worst in years. There are other divergences popping up all over the place like IWO (US small cap stocks), underperforming large caps (SPY), and the DJ Transports (IYT) not confirming the new high in the DJ Industrials (DIA). The fact that sentiment readings are bullish and hedge fund investors have been chasing performance most of the year suggests we are likely getting very close to an important trading top.


This bull depends on the US consumer


Author Cam Hui

Posted: 19 Mar 2012

I suppose I should be happy. I was correctly bullish on stocks and the Dow has decisively broken through the 13K mark, the NASDAQ Composite is through 3,000 and the SPX has rallied above 1,400. Positive momentum was confirmed by overseas markets such as the European markets, which also staged upside breakouts through technical resistance. It turns out I was right, but for the wrong reasons.

Surprising leadership
What’s been surprising to me is the nature of the leadership in this rally. This rally was underpinned by global central bank liquidity. The BoJ, BoE, ECB and the Fed have all undertaken some form of quantitative easing and the flood of liquidity usually buoys asset inflationary expectations, which leads to rallies in commodities, cyclicals and high beta growth groups such as emerging markets. This time, the leadership in equities has not been in those sectors, but something more unusual.

Consider where the leadership has come from in this rally. First of all, the usual defensive sectors such as Utilities and Consumer Staples are lagging (not shown). Next, we see a turnaround in Financials, which is consistent with the narrow miss from a global financial meltdown from the eurozone crisis. The chart below shows the relative performance of Financials against the market. The sector has turned around and staged an upside relative breakout, which is not surprising under the circumstances.

Next, we see surprising leadership from Consumer Discretionary, which is providing leadership as it is in a well-defined relative uptrend against the market.

In another surprise, we see a similar pattern with the Homebuilders.

There is also apparent leadership from Technology stocks, but the relative performance of Technology is mainly from a single stock: Apple.

Consider the relative performance of the equal weighted NASDAQ 100, which largely eliminates the price performance of AAPL. Views in this context, the relative performance of the Technology sector has actually stalled and it’s been rolling over in the last month or so.

What is surprising is that cyclical stocks are not showing the expected leadership in this rally, though they are participating in the upturn.

Neither are traditional high-beta groups like emerging market stocks.

Commodity prices, as represented by the CRB Index, are turning up – but the bull move has been anemic given the tsunami of central bank liquidity that’s hit the markets in the past few months.

The consumer ascendant?
What’s going on? What is the market saying?

I believe that the message of the market is growth depends upon the American consumer. We are seeing an unusual stock market leadership pattern and bond prices tanking (which I discussed in further detail here in my last post). What the market is saying, in effect, that the US economy is hitting escape velocity and growth, which is based on the US consumer, is starting to look self-sustaining.

Wow! The American Consumer is now the New Growth stock theme! Even The Economist is talking about a recovery – so it must be true.

True, the consumer is eating out more (see analysis here), which is a boost for Consumer Discretionary stocks. Housing seems to be stabilizing and showing uncertain signs of recovery, but there are indications that we are seeing a low quality housing recovery as the consumer seems to be trading down to mobile homes.

I was quite comfortable getting bullish based on a global central bank liquidity theme. As they say, “Don’t fight the Fed.” I am less comfortable with pinning my bullish outlook on the American consumer and robust US economy growth. With the ECRI sticking with its recession call, which is admittedly a fragile stick-your-neck-out call, this puts the rally on a less firm and riskier ground.

In fact, star bond manager Jeffrey Grundlach said in an interview that he expects bond yields to rise further and it would choke off any economic recovery:

Veteran bond investor Jeffrey Gundlach, who runs $30 billion at DoubleLine Capital in Los Angeles, said yields could rise further but the 10-year yield would have trouble holding much above 3 percent because that level would hurt the economy.

“Now that Treasuries have broken out to higher yields after six months of mind-numbingly low volatility, it is logical to expect the move to higher rates to last more than one week,” Gundlach said. “The way things look today I think a move toward 3.25 percent would weaken the economy noticeably.”

To be sure, high frequency economic releases have been coming in mainly above expectations, but insiders have been selling heavily, which is bearish. Looking globally, it’s not clear at all that this recovery is self-sustaining at all. To put the burden of the stock market rally on the US economy and consumer is indeed a heavy weight to bear.

The CRIC Cycle: Crisis, Response, Improvement, Complacency
Does this mean that investors should sell all their stocks and run for the hills? Not yet. Barry Ritholz wrote about what he termed the CRIC Cycle.

1. Response: When any crisis reaches a panic stage, authorities will typically react (and overreact) creating an overwhelming response to the crisis. This usually includes lots of cash and some immediate legislative relief.

2. Improvement: This response throw enough money at the problem that symptoms are temporarily relieved. The improvement is not structural, but rather, is driven by a sugar rush of excess liquidity. It feels good but it is not economically nutritious.

3. Complacency: The baling wire, chewing gum and duct tape improvements of the temporary patchwork repair creates a false sense of accomplishment. The improvements feel good, the data improves, markets rally. This leads to a sense of complacency amongst all parties (Government, private sector, banks, consumers, etc.)

4. Repeat: With few of the structural problems fixed, the excess liquidity eventually flows to the same sources of the original crisis, setting the stage for the next crisis .

He went to say that he believed the US is in the late stages of this cycle:

Bringing us up to date, the US appears to be deep in the Complacency stage. Things have noticeably improved, but the structural problems underneath remain.

In Europe, we seem to be late in the Response phase, awaiting the early Improvement part of the cycle to kick in.

I agree with his assessment. The chart below of a ten year history of the ratio of SPY (stocks) to TLT (long Treasury bonds) as a measure of the risk-on/risk-off tells me that this risk-on rally has further upside potential as risk appetites are only normalizing.

The Ritholz wild-eyed guess scenario, which he wrote on February 21, 2012 before the brief market downdraft, is sounding more and more plausible:

If the past is prologue (and that cannot be relied upon), we could see a scenario something like this (Note: Wild ass guessing to follow). Markets kiss 13,000, pullback and consolidate. But they are not overbought sufficiently for anything more serious than a modest retracement, and so they continue higher for several months, until the % of stocks over 200 day MA is near 90% (they are at 75% today). That takes us somewhere between March and June. The next sell off begins, lopping 25% or so off of the SPX. The Federal Reserve waits until after the November election to introduce QE3, and the cycle starts anew.

My inner investor remain bullish, but he is a nervous bull. My inner trader tells me not to worry. These issues with the American economy and consumer are 3Q or 4Q problems. So let’s party on, but keep an eye out for the exit.

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 (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.

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