10/16/09 Energy Market Update - Crude Oil & Natural Gas

Continuous Month Light Sweet Crude Oil Weekly:

The coiled up consolidation mode in oil has sprung and in the favor of the bulls. The nine month trend higher from the lows has now exceeded the seven straight months from the record highs to the lows, a movement in which started in February with oil at $35. Prices doubled by June before reaching a wall at the 200 day moving average and have since been consolidating for five months as the fight between bulls and bears emerged. Currently, the market is breaking out of its five month highs, and attempting to continue its upward trend by trading through the 200 day moving average. The strength and momentum should give the bulls drive to reach for and test the upper 80s. This breakout is also fueled by shorts who are being squeezed out as they are looking for the market to fail and move lower. Bulls continue to look for the $85-90 target. Off of the lows, this also retraces oil 50% to the highs. Major support is at $65-$60.

Continuous Light Sweet Crude Oil Monthly:

Black gold has shined 133% off of the lows from February of 2009. Taking the perspective from a big picture standpoint, this move is a 38% retracement to the highs of last year. What will be important here is how strong these levels will hold and if the market can continue at this pace. The market is trading within strong resistance between $75 and $80, with next major resistance and bull target of $90.

Continuous Light Sweet Crude Oil Daily:

A failed head and shoulders formation in oil with a failed breakdown late September leads oil to breakout to new highs for the year.

The lows of $58 in July and the highs of $75 in August spanned a $17 range. As the market has broken out the pennant recently (at $72) and through the 'head' of the h/s formation August through September, strength can add $17 to the breakout of $72 giving a reference and target of $89 for this new momentum.

Continuous Natural Gas Monthly:

Natural gas has tested the trend line from the 1999 lows and even traded under by a little over 50 cents, washing the market out as natural gas worked on finding a bottom. This was not done previously and many were trying to pick this bottom. Sure enough, the bottom has taken it's time to form, eroding the nerves of longs. After making a new low down to $2.409 in September, natural gas reversed and started the squeeze higher. This has created an engulfment on the monthly chart for September (seen above) and closing above resistance of $4.50. Support should be found down to $3.90 which is near 50% of the move in September from the opening to the close.

Continuous Natural Gas Weekly:

Natural gas tried breaking out early May only to find that the market was unable to move past $4.50, which repelled confirmation buyers looking for signs of strength in hope for a turn around. Natural gas has flagged lower for four months to make new lows, which then reversed off of those lows and created a "false breakdown" (highlighted in red). This false breakdown and reversal squeezed prices back to the upper part of the range. However, as the November natural gas became front month, this created a $1 gap higher on the continuous chart (from $3.98 to $4.94). In my opinion, this opening higher above $4.50 can now attract confirmation buyers that were standing on the sidelines and can be seen as a sign that the market is turning around. What market bulls will want to see is for the gap to act as support and look for weaknesses as opportunities to position in the market. Patience will continue to be the key in my opinion, buying close to $4.00 if given the chance. Using the green shaded area for entry, and a move under $3.00 as a reference for exiting if the market gets back to those levels. A target of near $6.00 is reasonable for bulls, as this also marks a 50% retracement from $9.60 to $2.40. This may also be where the 100 and 200 day moving average meet with prices.

I have previously been cautious about the markets attempt to bottom out. From my perspective, however, I now believe natural gas is ready to move higher. I would be more comfortable establishing long positions and letting the market work. If gas fails to rally and makes new lows then exit the trade.

Continuous US Dollar Index/Natural Gas Daily:

Remember the head and shoulders formation between March and May with the ratio of the US Dollar Index to natural gas? This topping formation that would potentially bring natural gas strength failed to materialize early and 19 proved to be strong support. After natural gas made a new low and washed out, this ratio climbed above 30. Now it is back down and through support of 19. This number should now act as resistance and we shall see if the trend continues lower as natural gas strengthens against the US Dollar Index. See '06/08/09 Energy Market - Crude Oil & Natural Gas Update' for reference.

Continuous US Dollar Index Weekly:

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Thank you and best of luck trading!

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT.

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An Uptrend: Nasdaq 100 Five Month (QQQQ)

Disclosure: I own QQQQ calls.

Any new radical ideas from Jim Rogers? Nope.

Saturday Rock Blog: Changes>Space Oddity

Fed Funds Rate vs Unemployment

I found this very interesting "epic" chart over at Calculated Risk. It suggests to me that the fed won't raise rates until long after unemployment peaks. This fits nicely with the notion that this stock market bubble will inflate for some time to come. Once the fed starts raising rates though, wow, watch out below.

$SPY

Laughable headlines: Stocks up today because of a "commodity surge"? Or did commodities surge with stocks because the dollar got whacked?

Here's something to think about, gold was up 2.5% today while the S&P was up 1.4%. Priced in terms of gold, the S&P actually dropped 1.1%. It is an illusion to think that you made money today if you own an S&P 500 index tracking fund. You made dollars, but you didn't make any value.

Reasonably bearish on IWM here

After a solid bounce off of its rising 50 day moving average last week, the small caps are looking like a decent short again here. Volume supports the notion that there is significant distribution as the broad market begins its long overdue correction following seven months up in a row. No, I am not expecting a crash, and no I don't think that this is the end of a bear market rally. Recall, that my "line in the sand" for IWM is at about $55. So long as IWM stays above that level I'll call this a cyclical bull market. Could there be a crash, is there risk in owning stocks? Of course, and I think few actually believe this is anything more than a collapsing US dollar fueled stock market bubble. But it is what it is, and right now the longer term trend is up despite expected weakness over the next month or so.

Disclosure: I do not have any position in IWM

On the BS that comes out of Wall Street

Saturday Rock Blog: Jesus Left Chicago (for Rio)

The Hunt for a Red October

Tim Knight turns beairsh on R2K (IWM)

This morning Tim Knight posted this beautiful chart over at his blog and announced he has begun accumulating Russell 2000 (IWM) puts. You may recall my note of the completion of that highlighed H&S pattern pecicely one year ago. Its interesting how times change so quickly. Anyways, Tim usually has great timing so be on your toes!

Disclosure: I own IWM puts

Modern Art

I got this image from the BBC via reddit, the caption read "Chinese artist Chen Wenling critiques the global financial crisis in What You See Might Not Be Real, on display at a Beijing gallery. The bull is said to represent Wall Street, while the man pinned to the wall represents jailed financier Bernard Madoff."

"USA Today/IHS Global Insight Economic Outlook Index" calls the economic bottom

Lets look back at this and see how this index does in hindsight. Their spokesman Nariman Behravesh seems to like a pretty level headed guy and he thinks the stock market is ahead of it's self. He's generally more moderate than most of what you see out there, Peter Schiff for example.

CNBC is back to being mean to Peter Schiff

Somehow we never learn, CNBC is back to trashing Peter Schiff and making themselves look like imbeciles. How is it that the headliners got so dumb again so quickly? This video reminds me of 2006.

IWM failed breakout

IWM recently broke out of a perfectly formed rising wedge then reversed after the fed interest rate announcement last week. After re-entering the channel I think its pretty safe to expect a test of the lower end soon near $56. There also seems to be price support just below there near $55 and thats my equivalent "line in the sand" for the small caps. Like SPX 950, IWM holding above $55 looks like a cyclical bull market whearas a break below that level looks to me like a resumption of the bear market ( since we'd have a series of lower lows in place). For now, the benefit of the doubt lies with the bulls and the odds go with long trades. Good luck this week.

Saturday Rock Blogging: Raving and Drooling aka Sheep (this market is full of them)

Short term (3 month daily chart) and long term (10 year monthly) technical arguments against CREE

Disclosure: I own CREE puts

Wedges that break the "wrong way"

Today I've got a few quick updated charts for you. They both display a relatively rare phenomena that seems to be happening more often lately or a rising (or falling) wedge that breaks upwards (or downwards), in other words, in the "wrong" direction. Traders expect rising wedges to break down and falling wedges to break up, but clearly that's not always the case.

According to Bulkowski, rising wedges break down 69% of the time and meet the price target ~50% of the time. So in the S&P chart below, we have the statistically unlikely upwards breakout occurring recently which targets roughly 1250 (coinciding with my head and shoulders target). For such an over extended market that target seems a little crazy but that's what the chart says. On the other hand, if this wedge does eventually break down, the target would be about 850 (including the 50% statistic). As you know, I think that if the S&P 500 slips below 950 then we will have a resumption of the bear market. So in my view this is really a crucial pattern here, and currently its breaking upwards suggesting that this is a cyclical bull market. And bull markets... well, they go up, and up and up.


Another wedge that broke the "wrong" way recently is in UNG which broke down then basically crashed a few weeks ago. Bulkowski says that falling wedges like the one in UNG, break upwards 68% of the time and meet their price target 70% for upwards breaks and 30% for downwards. Interestingly, if you include that 30% statistic then UNG actually met the target on that downward break. After the gory capitulation in which natural gas traders "got slaughtered," UNG managed to return into the wedge where it now lies in conolisdation. I call it consolidation because UNG has traded in a narrow range as volume has declined after a huge move up. Now that we are back in the wedge we must expect the wedge to break upwards again, as this happens 68% of the time. Further, the recent reversal of the downwards break gives support to the notion that any attempt to break UNG down will bring in demand. Note that confirmation occurs when the price closes outside of the pattern.

I'll just conclude with one caveat that Bulkowski mentions to these patterns, the dip:

"After a downward breakout (of a falling wedge), price sometimes curls around the front of the wedge and soars upward. The busted pattern presents a profit opportunity from the long side."

Disclosure: I remain long UNG calls

Saturday Rock Blog: Sweet Little Angel

Bloomberg: "Gas Fund Roll Slaughtered Traders"

"Speculators trying to profit from the U.S. Natural Gas Fund’s roll of futures contracts got “slaughtered” and helped boost volatility as gas prices surged this week, said Adam Felesky, chief executive officer of BetaPro Management Inc.

Gas for October delivery rose 27 percent, through yesterday, on the New York Mercantile Exchange, forcing traders to cover bets that the gas fund’s sale of the contract would reduce the price, Felesky said. Volatility jumped to the highest level since Amaranth Advisors LLC collapsed in September 2006.

Speculators shorted October gas, anticipating that the $4 billion gas fund would push prices down when it began selling its October contracts on Sept. 14, said Felesky, whose C$1 billion ($937.1 million) Horizons BetaPro Nymex Natural Gas Bull Plus ETF rolled around the same time as the larger fund.

“The ‘smart money’ was positioned ahead of the roll,” Felesky said. “Everyone was on the same side of the trade. The roll was a non-event, and everybody got slaughtered. I think it’s the pros that got killed.”"

I love this simple story of how "pros" got raped by their greed while trying to take advantage of retail investors. Find the rest of the article here.

Don't Dread the Natty, It Bottomed! (UNG to soar)

Well, today I was kicking myself over a post I wanted to do this weekend but didn't. I had wanted to post about the presumably bearish SEC filing from the managers of UNG on Friday afternoon. The news that came out was that UNG is going to start issuing shares again, in other words go back to being an open ended fund (note that a "closed end" fund is not a shut down fund). This was supposedly the news that the bears had been praying for because it meant that UNG's "huge" premium would go away and the UNG stock price would crash. Actually, that's not completely true, the news the bears had really hoped for was that UNG would be shut down like DXO last week. But seriously, no one expected UNG to be shut down, that was just the ramblings of idiots and thieves on message boards which had been mixed in with the usual crap articles coming out of Jim Cramer's junk website thestreet.com. No, this wasn't ever a real possibility but the street wanted you and I and anyone holding UNG or anyone dumb enough to short it to think so. No, UNG was not closed down, rather they will start issuing shares again to expand the fund in response to investor demand.

While the fund was closed, pending CFTC and SEC comforts, investor demand for natural gas did not go away, it in fact increased causing the ETF to outperform the NAV (net asset value (natural gas futures and swaps)). This led to a massive premium, unheard of in ETFs, of nearly 20%. Oh the bears jumped all over this, they screamed that longs would loose their ass when UNG started issuing shares again. The message boards were, of course, a zoo. Bears were screaming in all caps that "idiot bagholder longs" had low IQs and what not for buying UNG with a premium. Then on Friday UNG announced that they would start issuing shares again and UNG cratered 6% in the after hours. What a joke the headlines were recently like this weekend one: "Dion: Investor Alert -- UNG Shares to Slide" where the author says foolishly (in hindsight) that "in a filing Friday, managers of the United States Natural Gas ETF(UNG Quote) announced that the fund would resume the creation of new shares, a move that could send the fund tumbling more than 16%." Oh really, the market is that stoopid? No, the UNG NAV increased 14.8%, while the shares increased 2.5%, actually. Here is a six month continuous natural gas chart:

Today the front month natural gas contracts that you own when you buy UNG surged 14%. Why? Well, there was a bullish report about natural gas by Goldman Sachs (and we know they run the show), but it doesn't take a genius to say, oh, hey, natural gas is cheap, it might go up. I mean, I've been saying that for weeks! And I ain't no genius. No, I think natural gas went up so much because of the UNG announcement. UNG is clearly one of the biggest natural gas players in the market now and they told the market, hey, we are going to increase our positions going forward to meet huge and increasing investor demand. If that isn't bullish for natural gas, I don't know what is. Currently there are about 400M shares outstanding but UNG has approval from the SEC to expand that by up to 1 billion shares. They could expand their natural gas futures holdings massively if demand for UNG so merited it assuming the CFTC was cool with it. Clearly the CFTC must have given UNG the green light based on Friday's announcement.

So what happened to that big premium that the bears have been screaming about? It pretty much disappeared in a single day. Here is the UNG NAV (net asset value) compared to the UNG share price over the past week. Premium is gone (pretty much). I'd note that the premium can not go negative because redemptions would happen first(fund would completely evaporate before UNG fell below NAV)). Now it certainly looks like we are back to the good old open ended natural gas ETF that we want, one that is targeted to move with front month natty. So UNG can't under perform natural gas (by more than a few % annually), but of course, its now unlikely to outperform natural gas also.

So at this point we can expect that UNG will closely track natural gas and looking at natural gas (see top chart) I now see an obvious and solid long term bottom. I'll repeat that, natural gas has bottomed. Personally, I don't think natural gas will ever be cheaper in history than it was a week ago when the $2.40 low was made. I'm tempted to not even show the UNG chart because I'm so bullish on their holdings, but here it is:

The UNG chart doesn't look as great but that's because of the creation of and then dissolution of the premium (UNG was up only 2.5% today despite the surge in their holdings). This UNG chart does show capitulation, it shows bullish signals on the stochastics and almost on the CCI. It also shows a wedge that is about to confirm a failed breakdown reversal. I don't really see any other scenario possible besides a massive short squeeze to begin the next bull market in natural gas. Its too early, of course, to call this a bull market. But I bet that by the end of Fall I'll be posting about the new natural gas bull market that began here right now. There are issues, and always will be with investing in ETF's like UNG that roll through commodity futures, but the fact is its the simplest and most accessible method for profiting on the insane gains coming for this commodity. I think another great way to profit from the coming bull market in natural gas will be solar energy, but that's for another day, and another post. For now, this is a day for natural gas bulls. Hold them GAZ or UNGs!

Disclosure: I still own UNG calls.
More infon about UNG here.

Saturday Rock Blog: Blackpool Night Out (1965)

Gold is up, but still has 30% to go

Gold has been getting a lot of press lately for breaking the famed $1,000 mark. The gold ETF GLD (above) has performed slightly less well, but is also breakout out to the upside on long term and short term time scales. The pattern above looks like an inverted head and shoulders but I won't call it that because H&S patterns are reversal patterns. In this case the "H&S" is acting like a continuation pattern, since gold is in in a decade long bull market that recently had a very substantial correction. I guess it looks like a H&S bottom but we can prob expect it to act more like a cup n handle. Whatever you call it, we can be sure of a few things. Gold is bullish and it just had a major major breakout after a lengthy base formation. Using a simple measured rule I get a target of $130 for GLD or about $1,300/oz for the precious physical stuff.

By the way, for those of you who are worried that you aren't really buying gold when you buy the ETF GLD which holds gold futures and apparently some actual gold. Chicagostock and I recently explored the basement of the CME (Chicago Mercantile Exchange) and we were shocked by what we found in the vault: nothing. So beware, comex may be out of gold! Goldman Sachs must have taken delivery recently!! If anyone asks, you heard this rumor elsewhere. The second picture below is one I took of the S&P futures pit on a slow summer afternoon.

Another reason why NO ONE has ANY respect for bank executives like the idiots at Wells Fargo

Headline: "Wells Fargo exec. moved into beach home surrendered to bank"

"MALIBU, Calif. (AP) -- A Wells Fargo & Co. executive who oversees foreclosed properties hosted parties and spent long summer weekends in a $12 million Malibu beach house, moving into the home just after it had been surrendered to Wells Fargo to satisfy debts, neighbors said.

The previous owners of the beachfront home in Malibu Colony -- a densely built stretch of luxury homes that has been a favorite of celebrities over the years -- were financially devastated in Bernard Madoff's massive fraud scheme, real estate agent Irene Dazzan-Palmer said.

The couple signed the property over to Wells Fargo last spring, and the bank subsequently denied requests to show the house to prospective buyers, Dazzan-Palmer said.

Residents in the gated community told the Los Angeles Times that a woman they believe was Cheronda Guyton took up occupancy at the home in May. Residents said they obtained Guyton's name from the community's guards, who had issued her a homeowner's parking pass.

Residents also wrote down the license plate number of a 2007 Volvo sport-utility vehicle they say was parked in the home's garage. A check of state motor vehicle license plates by the Times found the vehicle was registered to Guyton.

Guyton is a Wells Fargo senior vice president responsible for foreclosed commercial properties, resident Phillip Roman said.

"It's outrageous to take over a property like that, not make it available and then put someone from the bank in it," said Roman, who lives a few homes away from the property.

Residents said Guyton, along with her husband and two children, often hosted guests at the home, including a large party the last weekend of August. Malibu Colony is about 25 miles from downtown Los Angeles.

Wells Fargo said in a written statement that it would conduct a thorough investigation of the allegations by neighbors, but said it wouldn't "discuss specific team member situations/issues for privacy reasons."

Guyton's home number is unlisted, and attempts to reach her at her Los Angeles office after work hours were unsuccessful.

The bank's agreement with the prior owner required it to keep the home -- a 3,800-square-foot, two-story structure built in the early 1990s -- off the market for a period of time, Wells Fargo said in the statement. The bank said it planned to list the property for sale soon."

These people make me want to throw up. Can we not form a lynch mob and wipe these worthless piles of crap off the planet? Original article here.

Marc Faber: In 5-7yrs the real crisis will begin when the government "goes bust," boom for now

Saturday Rock Blog: Mainstreet

Natural Gas (UNG): Trainwreck

I know readers are probably getting tired of me posting UNG charts, especially since I've been so wrong about it over the last two weeks, but I am just amazed by the price action there. This isn't some crap company like FNM or AIG or BAC or CROX, this is energy! Natural gas has completely collapsed despite the stock market bubble, collapsing US dollar and the continued reports of the recession ending. I look at the chart above and my jaw just drops. Yeah, I've lost money on UNG, but thats not why my jaw drops. I just never in my wildest dreams would have expected natural gas to drop so much and I bet I'm not alone in that belief. Fortunately, even thought I was initially bullish on UNG months ago, I turned bearish after seeing weakness. With the most recent plunge on increasing volume I suggest that this is the final capitulation that natural gas needed to form a bottom. While there is obviously no bottom here yet, we must be very close.

Disclosure: Yep, I still own UNG calls. Like a chump.

Play it off Keyboard Cat, play it off.

Another reason to be bullish on UNG: powerful wall street shorts are trying to cover at all time lows

When you see the headlines for UNG filled with wild eyed bearish sentiment you know some big wall street funds are trying to get out of their positions. So they pay some sham journalists to write up articles trashing their shorts to get individual investors to sell to them at the bottom. Not all of these headlines sound bearish, but all of the articles are. In summary:

This morning: "Short this ETF"
Yesterday morning: "UNG opens at 20% premium"
The past few weeks its been "contango will shred this ETF"

Come on folk, UNG is at an all time low, down 80% or so from the peak last year. Since it directly invests in natural gas futures, the futures have done just about the same thing. Is it really such a good idea to be shorting natural gas here at 7 year lows? Wall street scum wants you to think so. Gimme a break, this thing is a screaming buy here at the capitulation bottom.

The overdue pullback in the S&P 500 is here

Saturday Rock Blog: Like a Rolling Stone

Disclosure: I own UNG calls.

Our Hero

Commodity index GSG cup n handle failed breakout

Is it time to buy UNG yet? (I think so)

Disclosure: I own UNG calls

The Bear Market is Over

Yep, I'm ready to go ahead and call this one. In my view the US stock markets are no longer in a long term downtrend and began a new uptrend in mid July as the major US stock indexes made a significant higher high. This ends the bear market which in my opinion began in the first week of January 2008. Its a sad day for the remaining bears who go down hard in defeat as the fraudulent system (think Paulson (Bush), Dimon (JPM), Mozillo (CFC), Geithner (White House), Lewis (BAC), Bernanke (Feds), Liddy (AIG), Greenspan (Feds) prevails in victory. The cronnies who created this mess, for the most part, all got of a get out of jail free card plus a bonus.

Now I'm not gonna argue with those of you who remind me of rising unemployment, collapsing commercial real estate prices, the lower level of aggregate consumer demand or tell me that Obama's socialism will kill the economy. No I won't argue with any of that, but I won't give it much weight either. The markets are the pulse of the economy and they have the power to make or break global psychology. Was this rally based on bull shit? Yeah, most likely. Does it matter? No, not really, because if people get optimistic that things have turned around, if companies can start raising capital for expansion, if investors start making profits, then the fiction can become reality. And thats where I think we are today. Enough people drank the koolaid, who cares if we are all drunk as long as we have fun for a while right?

So thats it, I think this is likely to be a short bull market by historical standards. Perhaps lasting a few years. I could see the S&P 500 reaching close to the former highs in this bull, maybe higher. If I had to guess, I'd say this will be an inflation fueled frenzy of a stock bubble. Expect commodity prices to outperform stocks, and expect the leading stocks to be commodity producers. My guess is that at the end of this bubble you will see solar stocks at insanely astronomical valuations bringing back memories of the dot com bubble ("too the moon alice"). We are no where near the end of this bull, but expect the top to ultimately come from credit tightening by the feds after things get out of control.

Readers know, this opinion is entriely based on charts so here they are. In the daily chart below you can see that the S&P 500 made a very clear and significant higher high in mid July. The market followed through for about a week before goign sideways, it was at that time that my skeptical bearish tendencies kicked in and I really thought that the reality of the economy (all the bearish news the past few weeks) would roll us over and as that breakout failed volume would pick up. This did not happen. After a consolidation, mostly in time rather than price, the market made a new year high Friday on increasing volume. For me thats the confirmation I was looking for to define the previous long term downtrend as over.

So yeah, its pretty clear there to me. Now, I still have a knot in my stomach telling me this is all a big bull trap, and the economy will pull the market back down, etc, etc. I won't say that it is impossible for the bear market to resume, but it would be pretty damn hard. My line in the sand is 950 on the S&P, below there we are back in the 2008-2009 bear market. If we broke below 1000 again I'd start to get nervous being long, and either hedge myself or stop out. If the recent breakout does fail I'd imagine the market would go 1987 style and crash 10-20% in a few days. That being said, the odds are with the bulls from here forward.

In the weekly charts, I see massive inverted head and shoulders bottoms everywhere. On the S&P 500 (see top) that pattern targets about 1250 or 20% higher, a ~100% gain from the bottom this year. Below I have the market leading small caps (IWM) where the head and shoulders there nicely targets $75 which was the 2008 high.

This doesn't mean I am going to whole heartedly embrace stocks Monday, although I did heavily shift into UNG Friday. In the short term the market feels over extended and I would guess that we'll see a post options expiration correction early next week. Essentially, all the wealthy August call holders and put sellers will be taking profits on their newly aquired stock. Stocks will probably dip, but I think its time to buy that dip. If they don't dip next week, well, that would kinda suck. Again, I would stress that if the S&P 500 looses 950, this was a failed breakout and the vicious 2008-2009 bear market rises like a pheonix.

Disclosure: I own XLF puts and UNG calls.

Saturday Rock Blogging: Funky Nassau

ENDANGERED SPECIES: The Bear (eg TYH)

Come on folks, sell a stock, save a bear!

A tiny hint of a notion that there might be some weakness...

Disclosure: I own Jan QQQQ puts but was stopped out of TYH short.

The recent rotation out of smalls caps and in to financials in a broader context (the other way)

The narrow range of the past two weeks have been frustrating for just about everyone. The prior vertical run up had bulls wanting a pullback to add to positions and build support while the bears just wanted this parabolic bear market rally to end. I find myself in the latter camp but only barely so. It won't take much more upside for me to be convinced that this rally is for real and that we might be beginning a new bull market (that could last for years). Of course that's speaking from a strictly technical (chart based) perspective. Based on any fundamental metric, the notion of a bull market is criminal to me. But hey, I'm just here to read charts.


First we have the Russel 2000 ETF, IWM, over the past three months. Looks pretty bullish. I've pointed out golden crosses on other charts recently and the IWM has one too. After breaking past the key $53 mark IWM has been pretty much been range bound ($55-$58) . This flag-like pattern has served to work off overbought conditions but I'm not convinced. This whole move smells like a fake out (bull trap), where is the surge in volume that should have accompanied such a big breakout? Volume was declining until Friday's selloff which tested the bottom end of the recent range. I'd bet IWM retraces back to $53 where everybody will get there chance to vote with their wallets. Bulls will buy the pullback, Bears will try and run stops to force a failed move. The winner will draw in volume one way or the other...


The real meat of tonight's post is in the next chart. Lately I have noticed that the financials have really, really outperformed the rest of the market, especially the technology and small cap sectors. Don't ask me why this might be the case, the market behaves in seemingly naive and silly ways at times. But while big money has rotated from small caps into financials recently, the long term trend is a rotation the other way. Below I've got the financial sector ETF, XLF, divided by IWM. This is effectively a measure of financial sector valuation relative to the small cap sector:

So yeah, in the context of this three year trend (note the weekly time frame) the recent relative out performance of the financial sector is just a blip. For years now small caps have outperformed the financial sector by a wide margin and I don't see anything here to make me think that this trend is changing.

For a little more contrast on this issue I've got the ratio of Bank of America (BAC) to Apple (AAPL). Obviously, this ratio has gotten crushed by about 90% in the past three years despite having recently doubled. What I find most interesting about this chart is that you can see a roughly 5 month cycle in the sector rotation. That is, for about five months money moves from into banks like BAC, then for five months money moves into tech stocks like AAPL, then back to banks and so forth. In the end much more money has "rotated" into AAPL and so this ratio declined significantly.

To be honest I don't really know how much weight you can really put in these ratio charts but I have fun looking at them. If the five month cycle is true and if I'm right about the small caps pulling back here, then XLF should get hit pretty hard in the coming weeks.

Disclosure: I have puts on pretty much all this stuff including XLF, AAPL, QQQQ and IWM.

On an unrelated note, this weekend I was listening to an "oldies" radio station up in Chicago and they kept playing music from Woodstock mixed in with true oldies like Marvin Gaye and Roy Orbison. They were celebrating the 40th anniversary of Woodstock this weekend, which is great but come on, lets not start calling Classic Rock "oldies." No, I don't care how old I get, I will never call Santana, Joe Crocker, Jimi Hendrix or any of the other Woodstock acts "oldies." Hell no. What I will do, however, is join in with the "Oldies 94.5" in honoring this weekend's 40th anniversary of Woodstock with some Sunday night rock n roll. Enjoy:

Saturday Rock Blog: A Little Help From My Friends

Rally Monkey Gets Fired

Bankers: "The recession is over"

Saturday Rock Blog: Sweet Jane (it's a bull trap!)

I took some heat Friday but this action is feeling more and more like a capitulation top despite some obviously bullish technical signals. I maintained all my positions with stops set at Friday's highs. I'm hoping the recent breakouts will fail and that this is just a big bull trap to end a bear market correction rally. If the recent breakouts hold and there is follow through with volume then I'd be ready to declare the bear market over. On the other hand, if the market reverses then I'd expect a ton of late comer weak hands to panic. XLF should retest $11 if $13 breaks.

Disclosure: I own XLF puts.

A Chart a Day #19: DTG Parabola

Disclosure: I entered DTG puts this morning and re-bought index puts on market weakness. The S&P 500 can't seem to hold 1,000.

A Chart a Day #18: Auto Zone Clunked

AZO is a stock that I've been bearish on this year, and more or less rightly so. Today AZO made a new six month low on continued selling which I assume most would attribute to the cash for clunkers program, also known as the "don't fix your pos (piece of shit) car, buy a new pos car" program. Today's break brings into play a long term pivot for AZO at about $140 which is where I'd expect the bulls to put up a real fight. If you are bullish on AZO that's where I'd try a low risk entry, if you are bearish then I'd wait for that level to break on volume. If $140 breaks then this "consolidation" in AZO could rapidly turn into "oh no the momentum died in my over bloated retail stock" crash. This chart is beginning to look a lot like this oldie, but goody:

WTF: Bankruptcy Filings Soar With Stocks

I got the chart above from over at CalculatedRisk, its kind of a big wtf to me. Aparrently, personal bankruptcy filings were up a staggering 34.3% in July compared to last year while the S&P 500 rallied 7.4% last month. Obviously its not main street that is bidding up stocks, main street is loosing their job and filing for bankruptcy. It could be the shorts on wall street that were filing for bankruptcy but something tells me they are pretty far from bankrupt in this bear market. Its also interesting how the last time bankruptcy filings peaked was in late 2005, when the last stock market bubble was exploding to the upside. Now I'm not trying to go all fundamental or anything, I'm not short and if I was it wouldn't be because of this or any other economic statistic. It just makes me think to myself... what the fuck, what. the. fuck?

Keeping It Simple, Honoring My Stops

Hey folks, well its been a rough past two days for me and many who don't buy into this big breakout through 1000. We are all getting sick of the unending media headlines about how the recession is over when its plain as day that its not. With increasing job losses, accelerating earnings deterioration, a collapsing US dollar and a deterioirating still-overvalued housing market we know that the bounce in leading indicators is just a zag. Afterall, thats how volitile leading indicators usually work, they zig and they zag, rarely do markets and economies move in a monotonic fashion. So yeah, yeah, keep pumping it feds, its your only hope. Really, Obama, Geithner, Bernanke, its your only hope if you want to keep your jobs.

Anyways, yeah, I'm frustrated because I got stopped out on all but one of my recently entered bearish positions over the past two days even though I know I had gotten good long term prices. As frustrating as that is, I have to be practical when I look at the bubble before me. "The makret can remain irrational far longer than I can remain solvent." In stupid, ridiculous times like these it pays to keep things simple: S&P broke out, moving averages are rising, volume is rising, measured rule targets about 4% higher. If it rolls over and dies I'll be back on this market like a fly on .... But for now, I'll just sit back and expect the ovbious: That we plow higher but could crash at any second.

08/03/09 DX, NG, GC

Continuous US Dollar Index Weekly:

Continuous Natural Gas Weekly:

Continuous Gold Weekly:

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT.

Saturday Rock Blogging: You Can't Touch This

I see a plethora of inverted hammers and gravestone dojis on the Thursday and Friday candles of many charts, like on IWM above. I really don't see how anyone can touch this market on the long side.

Disclosure: I own IWM puts.