Investor Focused Market Analysis

The SP500 index (US Stock Market) continues to be in an Uptrend.
 
The major trend line on the chart below must be broken in a big way before a full blown bear market will be confirmed. This is still months away at best so do not worry. The AlgoTrades INNER-Market Analysis will get us positioned when the time is right and enable us to profit as the stock market falls in value.

Your long term equity investments can continue to be held at this point. Speculative and momentum stocks (Russell 2K index) continue to show weakness, so I would stay away from them. Large cap stocks will likely be in favor as the safe haven “blue chip” stocks, but when the market is ready to roll over, all stocks will fall. The safe haven plays should be bonds, gold, and inverse ETF funds.

We do fear a US dollar currency crisis, and if so investors will be moving away from US investments and the massive bond bubble may burst. But at this time, it is not a concern.

S&P 500 Quarterly Chart – BIGGER PICTURE

This chart I feel provides a great perspective on the overall market trend and price patterns. This is the 70 year prospective. I hope something like this unfolds. Fingers crossed to a 12 month correction/bear market. This will build the new base for the next super cycle.

US Dollar has now reached the upper resistance trend line... we could see weakness in the dollar going forward...

The Risk-Off Trade Is Slowly Unfolding

The S&P 500 index is losing its momentum. Money has been rotating into Bonds and global markets for a year in anticipation of the stock market correcting.

With six months of the SP500 index trading sideways we have had to focus on some other areas to find opportunities. Some recent winners have been long oil with UCO, long live cattle with COW, long Russia via RSX, and long Japan with EWJ. Those who follow my ETF trade alerts newsletter have avoided the recent chatter in the SP500. We have be doing even better with our active stock trades.

The Fear Index & Big Trend Analysis

The VIX index has been trading at low levels for a few years. This suggests that fear is low, complacency is high, and that SP500 is becoming vulnerable to a stock market correction.
In the chart below, I have placed the VIX index above the stocks trading above the 200 day moving average. As the number of stocks trading above the 200 day moving average falls it’s telling us that fewer stocks are moving up in value while the broad market climbs. This is bearish.
This provides a great visual of how falling markets correlate with investor fears. While overall market breadth remains strong, a change in the VIX often provides an early warning sign of potential danger.
“When The VIX Is Low Its Time to Go, When The VIX Is High Its Time To Buy”

Stock Market Rises with Fewer Stocks – RED FLAG

Since mid 2014 the US stock market has become move volatile. Fewer stocks participating in the markets move up. This can be seen by comparing the percent of stocks trading above their 200 day moving average and the S&P 500 index.

When a stock market stalls, which is what it appears to be doing, the movement is comparable to that of how an aircraft stalls. It slowly continues to rise, things become choppy/unstable, then it drops and picks up speed trying to regain stability and control.

Once the stock market or an aircraft come to a complete stall they both end with a violent drop. While I am not calling a top yet, understand each month we are getting closer.

An analyst and trader I respect talked about how the Dow Jones is flat for the the year, yet investors think big profits are bing made. But in reality we have not seen real gains and the broad market expand in months. More investors are bullish now than we have almost ever seen according to Investors Intelligence Survey with a whopping 57% of investors bullish on stocks.

The CEO of Ameritrade said that almost all of their 6 million traders/investor account are completely invested in stocks, and are leveraged using margin also. This is the ultimate contrarian warning sign of a bear market should begin over the next few months.

INNER-Investor Monthly Conclusion:

The great thing about being an investor is that the analysis and trends move relatively slow. We do not buy at the dead low, nor do we exit at the high, and sometimes we get shaken up during tough phases in the market like the second half of 2014 and first half of 2015.

I’ll be honest, the second half of 2014 and first portion of 2015 has been exceptionally tough to generate profits.

Winning streaks, and losing streaks are just part of investing and it happens to everyone and every strategy as the market has difference market phases and characteristics.

I believe the second half 2015 is will provide great opportunities and we will close the year out with decent gains.

Chris Vermeulen

Market Trend Forcast

True Investments VS Speculative in Gold & Oil

A couple of weeks ago I was listening to an hour-long segment on CNBC with Warren Buffett. He brought up a great point about the type of investments he prefers and the difference between an investment versus a speculative trade. I feel what he mentioned is worth sharing so here it is.

He stated that he prefers to hold an investment which is earning money and generating cash flow. Meaning he prefers to own equities of companies which generate income for its shareholders versus a commodity which  does not generate any revenue.

While Mr. Buffett said that gold is a commodity everyone should own some of, he also clearly stated that buying a commodity in hopes that someone will pay you more for it later is purely speculative. Lets face it, would you rather own something that paid you monthly or annually a cash dividend or something that might go in in value, but may also lose value?

Investors and traders are primarily focused on purchasing gold stocks, physical gold via ETF’s, gold bars and coins which none of these provide any income the holder. But after doing some in-depth research I have found another way to invest in precious metals and commodities that will not only give you exposure to the gold, silver, and oil sector but it can also generate a monthly income stream to your portfolio.

Through Gabelli closed-end funds like the Global Gold, Natural Resource & Income Trust (GGN), or Natural Resource, Gold & Income Trust (GNT) you can get the best of both worlds.

Each fund is currently providing a 10% annual dividend paid out in monthly distributions. The Fund’s investment objective is to provide a high level of current income. The Fund’s secondary investment objective is to seek capital appreciation consistent with the Fund’s strategy and primary objective. Under normal market conditions, the Fund will attempt to achieve its objectives by investing 80% of its assets in equity securities of companies principally engaged in natural resource and gold industries, and by writing covered call options on the underlying equity securities.

If you don’t know what covered calls – Explained Below:

A “covered call” is an income-producing strategy where you sell, or “write”, call options against shares of stock you already own. Typically, you will sell one contract for every 100 shares of gold or oil stock. In exchange for selling the call options, you collect an option premium.

With the US stock market slowly nearing a bull market top and with commodities trading at multiyear lows we should eventually see a shift in money flows out of stocks and into commodities. With rising commodity prices resource base stocks should start a new bull market that will send these funds dramatically higher in value while still paying a juicy dividend income.

In conclusion, if you want to invest in precious metals long-term I think owning an income strategy based around that investment is a great way to add diversification and income to your portfolio. Learn more about trading ETFs, funds and copy every trade I place with my own money at www.TheGoldAndOilGuy.com

Chris Vermeulen
Disclaimer: I currently own shares of GGN

Do Equities Just Correct or Collapse in 2015?

The question on everybody’s mind for 2015 is when will the stock market start to correct in value and will it turn into a 50+% collapse?

Over the last 15 years investors has been through a lot in terms of market volatility. From the 2000 tech bubble bear market and the 2008 financial crisis bear market investors are far from having their investment psyche scars healing and is for good reason. Many sustained 50+% loss in their portfolio value more than once and are not willing to do it for a third time.

A large group of investors exited the stock market and has never returned. Unfortunately those who exited have missed the seven-year bull market rally to all-time highs. Those who remain in the market are in constant fear that a new bear market will emerge.

The stock market has a tendency to move in a 6 to 8 years cycle. With the current bull market now lasting seven years and was several indicators signaling weakness within the equities market it makes logic sense that a bear market is about to emerge.

The stock market cycle and technical indicators are not the only causes the trigger a bear market. A rising Fed funds rate can cause weakness in the equities market and if you know what to look for you can escape the next bear market and profit from falling prices.

Question: if you could put your money in a guaranteed investment not to lose any principle and receive a 1% per annum return on investment or receive potentially 7% per year but with no guarantee on your principle, which would you choose?

Most people would choose the 7% return option because they understand financial rewards almost always require some risk. Over the last 90 years the stock market has on average returned 7% annualized gains.

Obviously not all years will have a positive gain, but when averaged over many years, it is reasonable to expect an annual return of 7% from the stock market.

What if I told you there is a way to improve on this? For example, if you simply moved your equity investments to a large cash position at the start of each bear market?

The chart below showing the gain from your would have has from 1995 to 2015 by selling all stock holdings when the US stock market topped during 2000 and 2007 avoiding the last two bear markets.

100% cash position during bear markets would have generated 635% ROI, which is a 31% average annual return. The numbers are staggering to say the least. But obviously you cannot pick the exact top and bottom, but even if your timing was way off and you only pocketed half of those gains you would still be way ahead of game.
 

You may be asking yourself: How do I avoid a bear market?

I believe for investors this is not that difficult because a major trend change takes time and because the moves are so large you don't need to be perfect with your timing.

Take a look at my analysis charts below. The first one shows the 10 year treasury price which is broken its short term resistance levels and is rocketing higher. We have seen this happen 6-12 months before the last two bear markets started.

Let’s take a look at the Fed rates. 

Not every rate rise turned into a recession, but nearly everyone has. Rising rates will lead to a market downturn.

Could the next bear market/recession occur when rates start to climb? After analyzing economic data provided by Brad Matheny I have a max rate at 2% over the next couple years. 

That combination of technical indicators, analysis above couple with the rising fed rate hikes had created the perfect storm for a bear market to emerge which I expect to last 1-2 years.

Bottom line, we are still in a bull market but only months away from a bear market. Do not ignore these warning signals.

Keep your eye on the 2 year treasury rates instead because they usually lead Fed funds, and will provide an earlier warning signal as to the markets down turn.

When rates start to rise, we may only be weeks, instead of months, before the stock market starts to collapse.

Article contributed by Chris Vermeulen from Market Trend Forecast

Gold vs. S&P 500

Gold vs. S&P 500 – Where is the Value?

This past week we received the final 4th Quarter GDP number which came in at 0.39%. The total 4th Quarter growth was terrible, plain and simple. Based on the performance in the equity markets that we have seen thus far in the 1st Quarter of 2013 investors would expect strong GDP growth. However, the only thing spurring stock market growth is the constant humming of Ben Bernanke’s printing press.

The real economy and the stock market are no longer strongly correlated. Essentially, they are meaningless. How do you evaluate risk when Treasury linked interest rates are artificially being held down by the Federal Reserve? How do you evaluate earnings growth estimates when most government based statistics are manipulated or “smoothed” to perfection?

My final argument to anyone who is a true believer that the stock market is representative of the economy is a very simple premise. If the stock market is the economy, how does the stock market evaluate small business earnings growth when most small businesses are not publicly traded? It is a simple question, but I have yet to find a sell side analyst that can work around it with facts.

To back up this information, here is a chart courtesy of www.zerohedge.com that demonstrates the S&P 500’s price action compared to economic data and overall macro risk.

The chart above clearly depicts the divergence between the macroeconomic data and the performance of the S&P 500 Index. Yet the sell side continues to scream that stocks are cheap, earnings are going to ramp up later this year on insane S&P 500 earnings growth expectations, and the consumer is going to remain strong even though payroll taxes have increased and the “wealthy” are paying more in taxes.

Even amid those concerns, no one knows for sure what the impact that Obamacare and the various new taxes associated with it will have on the business community. Again, the only thing driving growth is directly linked to the Federal Reserve’s balance sheet expansion. The chart below is courtesy of the Federal Reserve’s website.

On August 8, 2007 the Federal Reserve’s total assets were $869 billion dollars. As can clearly be seen today, according to the Federal Reserve the central bank’s total balance sheet has grown to over $3.2 trillion dollars. The increase is on the verge of rising exponentially. With QE, QE2, QE3, Operation Twist, Extended Operation Twist, and now with QE 4 in Perpetuity this trend is certainly unlikely to shift.

At this point in time the Federal Reserve is printing roughly $85 billion dollars each month to purchase Treasury securities with a focus on the long end of the maturity curve. As primary dealers of Treasury securities process these flows the money eventually finds its way into riskier assets that offer higher rates of returns through balance sheet machinations at large money center banks.
It has proven that the flow of the Federal Reserve’s printed monies are more important than the total money stock for a variety of reasons and inflation according to the government’s data is under control ex food and energy.

However, how are people supposed to survive without food and energy in today’s world? The last time I went to fill up my gas tank or to purchase food prices have gone up significantly. According to the 1990 version of consumer price reporting, real consumer inflation is running around 6% currently and shadowstats.com has the following comparison.

Unfortunately the 1980 based inflation numbers are even uglier, which based on Shadowstats’ data chart would place consumer inflation at nearly 10%. The calculations being used by Shadowstats.com are based on the government’s OLD ways of calculating inflation. The calculations were adjusted over time and today the data is completely manipulated by not including items that typically experience the largest levels of inflation.

Normally I talk about price action, probability based option trading, and technical information. However, before investors consider buying stocks near the all-time NOMINAL (non-inflation adjusted) highs, why not simply consider the backdrop of the total economic situation.
Central banks around the world are printing money at an alarming rate and their balance sheets are growing to levels not seen in human history. Interest rates are being manipulated to levels that are historically at record lows or near record lows based on real inflation data.

Macroeconomic indicators are issuing a cautionary tone with significant divergences showing up in many areas. Earnings expectations for the S&P 500 in the 3rd and 4th Quarter of 2013 are extreme and borderline ridiculous.

So before jumping headlong into equities based on some sell side analysts recommendation or even worse, a financial advisor who is more interested in his/her commission than they are about producing gains consider the following comparisons.

S&P 500 Index (SPX) Price Chart – 1 Year Price History

Gold Futures Spot Price Chart – 1 Year Price History

Clearly paper gold represented by gold futures is no substitute for physical ownership, but when one considers the fundamental backdrop for gold versus the S&P 500 Index, it should be clear which asset is offering the most value at current price levels. It does not require any inserted trendlines or oscillators, it should be clear which asset is expensive and which asset is cheap based on the real long-term economic fundamentals.

Article contributed by JW Jones from Technical Traders

SP500 Wave Pattern

Final Stages of The Advance on SP 500-The Wave Pattern

Over at our TheMarketTrendForecast.com service we have been projecting  a potential rally pivot at 1552-1576 for many weeks now.  The recent drop to 1485 although harrowing, was a normal fibonacci re-tracement of the last major rally leg to 1531 pivot highs.  We believe that this 5 wave advance 1343 pivot lows is nearing an end based on mathematics and relationships to prior waves 1-3.

At 1569 the SP 500 would mark a perfect fibonacci relationships to waves 1-3 for this final 5th wave to the upside.  In the big picture, we are still working higher off the 1010 pivot lows on the SP 500, and this rally takes 5 full waves to complete. We think we are near wave 3 highs, and wave 4 correction would be up next, followed by another thrust to highs if all goes well this year.

That all said, a multi-week correction and consolidation wave 4 pattern is likely once we pivot at 1552-1576.  We should expect this correction to retrace anywhere from 80-100 points on the SP 500, but one week at a time.

 

Article contributed by Chris Vermeulen from Market Trend Forecast

The currency wars

The currency war: now and then

Global currency wars worries have resurfaced in recent weeks, mainly because of Japanese action on the yen. In order to understand the meaning of this so-called war, we would have to go back in time to the 1930's. Back then, the currency wars scared economists as they had a big part in the Great Depression in the 1930's. The damage done to global financial markets in that period took several decades to repair, and a repeat of this nightmare cannot be ruled out completely. However, there are large differences between the 1930’s and nowadays and the results of what is happening may differ as well. In the past, it seems like currency wars were defined as any policy that is intentionally designed to drive down the value of a currency, whether by local inflation or an exchange rate decline. It is quite the same thing in the long run since a rise in inflation relative to other countries will eventually be fully reflected in a lower exchange rate.

So what about today's currency wars? The conclusion of what happened back then was that a currency war which results in an equal currency devaluation, along with monetary easing, would probably have been much less damaging than the direct trade and exchange control retaliations which actually occurred in the 1930’s. Currency wars could still develop into direct trade wars, though even if they do not, they could lead to other problems like commodity inflation and asset price bubbles in the emerging economies, though so far, we are not seeing a repeat of the 1930’s.

Goldman Sachs bank support this opinion, stating that "this configuration of asset market moves - the real rate declines, steepening in nominal curves, currency depreciation and the pattern of domestic equity sector outperformance - is  more consistent with a bout of monetary easing that is expected to prove expansionary, rather than a currency war interpretation".

American economist Paul Krugman also believes that what is going on today is all a currency war misconception. According to Krugman, it would be a very bad thing if policy makers take it seriously, as "the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930’s this was because countries threw off their golden fetters, they left the gold standard and this freed them to pursue expansionary monetary policies".

G-20 and the currency war

The Group of 20 finance chiefs sharpened their stance against governments trying to influence exchange rates. Two days of talks between G-20 finance ministers and central bankers ended last week with a commitment not to “target our exchange rates for competitive purposes”. This stance is stronger than the one they took three months ago and might affect Japanese officials to stop publicly giving guidance on their currency’s value. Today the yen is near its lowest level against the dollar since 2010, while policy makers are trying to calm concerns that some countries might be trying to weaken their exchange rate in order to encourage export and by that, the economic growth. According to the G20, and contrary to the opinions of GS and Krugman noted above, the risk is a 1930’s style of devaluations and protectionism. Bundesbank President cited that “Politically-motivated devaluations can’t sustainably improve competitiveness; they don’t solve structural problems and they set off reactions”.

We shall mention Japan once again, as the Bank of Japan Governor Masaaki Shirakawa said: “The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices". In the G20 meeting, Japanese officials denied driving down their currency, and according to them, its fall was a byproduct of their effort to accelerate the Japanese economic growth rate.    

More we shall mention that the IMF Managing Director said that the talk of currency wars is overblown, and Federal Reserve Chairman Bernanke said: "the U.S. has deployed domestic policy tools to advance domestic objectives and bolstering the U.S. economy will support world growth".

Economic releases and events of the week

• Monday: Eurozone Finance Ministers Meet in Brussels
• Tuesday: EU-27 Finance Ministers Meet in Brussels, Eurozone Services PMI, Eurozone Composite PMI, U.S. ISM Non-Manufacturing (all for February), Eurozone Retail Sales (January, expected to slightly increase)
• Wednesday: Eurozone GDP 4th quarter (expectations for a decrease of 0.6%), U.S. Federal Reserve Releases Beige Book
• Thursday: ECB Main Refinancing Rate, Draghi to hold a press conference after Rate Decision, U.S. Trade Balance January (expectations for an increase in the deficit)
• Friday: Germany Industrial Production, U.S. labor market data - unemployment rate and Change in Nonfarm Payrolls

Gold, Oil & the SPX Trends and Setups

Over the past year my long term trends and outlooks have not changed for gold, oil or the SP500. Though there has been a lot of sideways price action to keep everyone one their toes and focused on the short term charts.

We all know that if the market does not shake you out, it will wait you out, and sometimes it will even do both at the same time. So stepping back to review the bigger picture each week is crucial in keeping a level trading/investing strategy in motion.

The key to investing success is to always trade with the long term trend and stick with it until price and volume clearly signals change of trend. Doing this means you truly never catch the market top nor do you catch market bottoms. But the important thing is that you do catch the low risk trending stage of an investment (stage 2 – Bull Market, Stage 4 Bear Market).

Let’s take a look at the charts and see where prices stand in the grand scheme of things for gold, oil, energy and stocks…

Gold Weekly Futures Trading Chart:

Last week I talked about how precious metals were nearing a major tipping point and to be aware of those levels because the next move is likely to be huge and you do not want to miss it or even worse be on the wrong side of it.

Overall gold and silver remain in a secular bull market and hav gone through many similar pauses to what we are watching unfold with them over the past year. As mentioned above the gold market looks to be trying to not only shake investors out but to wait them out also with this 18 month volatile sideways trend.

A lot of gold bugs, and gold investors of mining stocks are starting to give up which can been seen on the charts when reviewing the price and selling volume for these investments. I am a contrarian in nature so when I see the masses running for the door I start to become interested in what everyone is unloading at bargain prices.

Gold is now entering an oversold panic selling phase which happens to be at major long term support. This bodes well for a strong bounce or start of a new bull market leg higher for this shiny metal. If gold breaks below $1500 – 1530 levels it could trigger a bear market for precious metals but until then I am bullish at the current price.  I do think we could see another spike lower in gold to test the $1500- $1530 level this week but after that it could be off to the races to new highs.

Crude Oil Weekly Trading Chart:

Oil had a huge bull market from 2009 until 2011 but since then has been trading sideways in a narrowing bullish range. I expect some big moves this year for oil and technical analysis puts the odds in favor for a higher price.  If we do get a breakout and rally then $130 will likely be reached. But if price breaks down then a sharp drop to $50 per barrel looks like the next stop.

Utility & Energy Stocks – XLU - XLE – Weekly Investing Chart

The utility sector has done well and continues to look very bullish for 2013. This high dividend paying sector is liked by many and the price action speaks for its self… If the overall financial market starts to peak then these sectors should hold up well because they are services, dividend and a commodity play wrapped in one.

 

SP500 Trend Daily Chart:

The SP500 continues to be in an uptrend which I am trading with until price and volume tell me otherwise. But there are some early warning signs that another correction or a full blown bear market may be just around the corner (Selloff in May??).
Again, sticking with the uptrend is key, but knowing what could happen in the coming months gives you some time to start looking for some great shorting opportunities for when the trend changes. Your transition from long positions to short positions should be a simple measured move in your portfolios and not a panic reaction.

Weekend Trend Conclusion:

In short, I remain bullish on stocks and commodity until I see a trend change in the SP500.
The energy sector is doing well and looks bullish for the next month or so.

Gold and gold miners, I feel they are entering a low risk entry point to start building a new long position. Risk is low compared to potential reward so depending on how things unfold this week I may start to get active in this sector.

Keep in mind that when the price of a commodity or index trades near the apex of a narrowing range or long term support/resistance level volatility typically increases as fear and greed become heightened. This creates larger daily price swings so be prepared for some turbulence in the coming weeks while the market shakes things up.

If you like my work then be sure to get on my free mailing list to get these each week on various investments for investment ideas at www.GoldAndOilGuy.com

Article contributed by Chris Vermeulen