Thursday, July 28, 2016

Is the tape being painted for Hillary?

In the old-school lexicon of Wall Street, the term “painting the tape” referred to the large scale purchase of market-moving stocks by insiders for the purpose of giving the market an appearance of strength.  Painting the tape was practiced by “pools” and large firms who were in the know; it was designed primarily to present a picture of strength when there was an undercurrent of weakness. Painting the tape was also done in some cases to trick amateur traders into buying certain individual stocks by means of manipulating the stock’s trading volume. 

While the technique of “tape painting” has changed since those days, the practice of manipulating the market is still quite common. Indeed, it happens on a daily basis and successful speculation requires the ability to recognize it and deftly sidestep its intended consequences.  That said, now would be an appropriate time to ask the question: “Is the market’s recent internal strength the result of natural demand or of manipulation?”  And if the latter is true, for what purpose is the market being given a false appearance of strength? 

Let me begin by asserting that I don’t believe the broad market’s increasing strength since February is the result of outright deception.  While there may be individual stocks, and perhaps even select industries, which are undergoing active manipulation the fact that the stock market’s recovery is nearly six months old is an argument for legitimate demand-driven buying.  Experience has taught that it’s not possible to artificially strengthen a market for that length of time, especially when the NYSE new high-new low differential is so consistently strong.  There must be broad-based demand, for no clique or coterie could possibly keep the entire market elevated for that length of time without widespread participation.    

Having said that, I’ll acknowledge the possibility that the recent breakout in the large cap indices may have been premature.  While it was accompanied with great fanfare, the breakout to new highs was unaccompanied by some of the other major indices, including the Dow Transports and the NYSE Composite Index (NYA).  The important financial sector stocks, moreover, remain stuck in their lateral trading patterns of the past year and didn’t confirm the breakout, either. 

If the tape is being painted, for what or for whom is the fireworks display being made?  The most obvious culprit would be the upcoming U.S. presidential election.  One possibility is that a large contingent on Wall Street is trying to influence the outcome of the November election.  There’s a well-known historical association which states that I the stock market rallies in the months before the election the incumbent party typically wins.  The idea in fashion among Wall Street pros is that the Democrat nominee’s policies would favor Wall Street.  By contrast, there seems to be no clear consensus among pundits that the Republican nominee would be good for stocks. 

A correlation has also been made between the periods of weakness in the financial market this year and the surges in candidate Trump’s popularity.  Trump has enjoyed his greatest campaign success when stocks have stumbled or remained subdued for long periods.  An extended rally in the major indices, however, has coincided with a drop in his positive polling.  There is, in other words, an inverse correlation between Trump and the prevailing stock market trend. 

Again I must emphasize that this is merely a speculation on my part and cannot be empirically proven as a definite reality.  If the new highs are being engineered for political or economic reasons, however, it will become clear in the months ahead.  We’ll know, for instance, if the new highs are artificially induced if the banking and broker/dealer stocks are unable to make yearly highs in the next few weeks.  Failure of the Dow Transports to confirm the new high in Industrials would be another clue.  In particular traders should keep a close watch on the chart of the NYSE Securities Broker/Dealer Index (XBD) shown below.  The best and strongest extended bull markets have always been confirmed by higher highs in the XBD.

If the tape is indeed being “painted” then we can expect to see continued new highs in the Dow and SPX in the coming months, even if unconfirmed by the other indices and industry groups.  Large cap stocks have been the beneficiaries of the informed buying of recent months and show no signs of being under distribution.  Internal selling pressure within the NYSE broad market is nonexistent right now, which favors the bulls in their attempts at pushing large cap stocks higher before the election.  There may, however, be a reckoning after the election is over.  

In the meantime traders have some fantastic opportunities to take advantage of the favorable internal conditions within several of the market sectors.  As a painter might say, one should never let a good canvas go to waste.

Wednesday, July 27, 2016

The great gold stock rally

This year has been extremely kind to gold and silver mining stock investors.  If you were one of the few participants to have had the courage to buy when no one else was interested, you certainly have enjoyed a profitable ride so far.  Thankfully our subscribers were among those who took the plunge and bought mining stocks when they were cheap.  We’ve been basking in the rewards in the past few months and hope to continue our winning streak in the months to come.

Here’s what our performance has been in like since last year.  The following graph is a weekly tally of all trading recommendations made in the Gold & Silver Stock Report.  This includes all gold/silver ETF and individual mining stock trading recommendations.

As illustrated by this chart, patience is typically rewarded whenever you consistently practice a reliable trading discipline.  Discipline is the key word here, for without it a trader will always succumb to blind emotion and eventually lose money.  That’s why discipline [i.e. sound money management] is so important whenever you’re operating in the financial market.  With GSSR, you always have the advantage of a time-tested discipline at hand and you can always be assured of avoiding the big market declines while benefiting from the big rallies.  This is how a trader or investor comes out a winner in the long-term scheme of things.

Tuesday, July 19, 2016

Is Kyle Bass finally getting his revenge?

One of America’s most prominent hedge fund managers is betting the farm that China’s economic troubles are far from over.  His bet centers around the U.S. dollar and by extension several Asian currencies.  What happens to the dollar from here will determine whether this man’s epic trading positions pays off, and China suffers a major setback, and whether his worst case scenario for the global economic outlook is merely a mirage.  If he’s right, the outcome of his bet will also affect the commodities market and perhaps even the equities market. 

Below is a graph of the PowerShares U.S. Dollar Index Bullish Fund (UUP), an excellent proxy for the U.S. dollar index.  UUP is useful since it allows us to see trading volume patterns, particularly since UUP is a favorite of institutional currency traders.  The graph shows that UUP has been establishing a short-term base of support above its rising 15-day moving average for the first time this year.  The recent breakout attempt above the nearest pivotal chart benchmark at the 25.00 level technically paves the way for a dollar rally, which may in turn create some short-term headwind for equities. 

A decisive breakout above the 25.00 level in UUP would allow the ETF to retrace more of its losses from past months.  Any rally in the dollar from here would also put a bit of a strain on some of the major foreign currencies, which in turn would cause global investors to become more apprehensive.  One reason for bringing up the dollar is the famous bet made by the billionaire hedge fund manager Kyle Bass.  Bass made headlines when he correctly predicted the 2008 credit crash, and he has made another big short trade against China. 

According to the Wall Street Journal, Bass’s Hayman Capital Management sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar.  “About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years – a bet with billions of dollars on the line, including borrowed money,” according to the WSJ.  “’When you talk about orders of magnitude, this is much larger than the subprime crisis,’ said Mr. Bass, who believes the yuan could fall as much as 40% in that period.”

In an interview on FOX Business Network’s Wall Street Week on Apr. 15, Bass clarified his investment position:

So we have all of our focus on Asia.  We don’t have any money invested in Asia.  What we have is, we’re long the dollar, the U.S. dollar.  And we’re betting against the Chinese currency, i.e.  If we’re right about the banking crisis and we’re right about the fact that they’re going to do everything that it takes to fix themselves, which they will.  They’ll recap their banks.  They’ll reform, everything they can do on the spending side.  They’ll…do everything they have to do….What that means, their currency is going to have a massive devaluation.”

Essentially, Bass is betting that Asian currencies will fall while the U.S. dollar will strengthen.  For much of 2016 his bet didn’t pay off, but things are starting to go a little more in his direction.  What’s more, his investment time frame is long enough to allow him leeway to ride through periods of dollar weakness and Asian currency strength.  Incidentally, here’s what the yuan trend looks like through the lens of the WisdomTree Chinese Yuan Strategy Fund ETF (CYB).

In a July 1 interview on Real Vision, Bass told investors that China’s $3 trillion corporate bond market is “freezing up” amid rising defaults and canceled debt sales.  “We’re starting to see the beginning of the Chinese machine literally break down,” he said. 

China’s corporate bond market contracted by a record amount in May as tepid economic growth and a spate of missed payments spooked investors.  Seventeen publicly-traded Chinese bonds have defaulted so far this year, up from six in 2015, and at least 188 firms have scrapped or delayed debt sales since the end of March, according to Bloomberg.  See graph below.

In the Real Vision interview, Bass reiterated that China’s lending binge in recent years has created “the largest macro imbalance in world history.” He expects bank losses of $3 trillion to trigger a bailout, with the central bank slashing reserve requirements, cutting the deposit rate to zero and expanding its balance sheet – all of which will weigh on the yuan.

Bass doesn’t believe that China will experience Armageddon, however.  “They are going to [recapitalize] the banks, they are going to expand the People’s Bank of China’s balance sheet, they are going to slash the reserve requirement, they are going to drop their deposit rate to zero, they are going to do everything the United States did in our crisis,” he said.

Bass and his hedge fund have had a rough go for the last couple of years.  If the dollar manages to get a rally started in the coming months, however, he would have a measure of revenge against his many critics who contend that China is in much better shape than Bass contends.  A dollar rally may also have the spillover effect of at least temporarily putting a drag on the stock market’s rally. 

As mentioned previously, in 2016 more than ever the global financial outlook depends on the prevailing trend of the U.S. dollar.  Since last year the dollar’s strength has been inextricably tied to global market weakness while dollar weakness has led to stock/commodity market strength.  A breakout in the dollar index below its benchmark chart resistance (highlighted below) would serve as a harbinger of returning U.S. currency strength and potential weakness for commodities and possibly equities.  It would give the China bears like Kyle Bass their moment in the sun. 

Kyle Bass’s “revenge” is no private matter but something that concerns all investors.  For that reason, what happens to the dollar from here will take on added significance.  

Wednesday, July 13, 2016

A real estate mania redux

Among the biggest relative strength leaders in the U.S. broad market right now are the home builders and REITs.  The U.S. real estate sector is heating up and is also beginning to attract “hot money” inflows from foreign investors looking for a profitable safe haven.  Real estate is building a measure of momentum not seen since before the 2008 credit crash.  As such, the question as to whether a renewed property market mania is underway is a timely one and will now be addressed.

The following graph of the Dow Jones Equity REIT Index (DJR) illustrates the growing demand for hot properties.  REITs in particular have been on a rip-and-tear of late as reflected in the chart.  Ultra low interest rates and continued agency bond purchases by central banks have helped bolster real estate and the related equities, among other factors we’ll discuss here

Investors should accordingly expect to hear more enticing stories about the desirability and investment potential of U.S. commercial and residential real estate in the months to come.  One such story appeared in a recent article entitled, “How Brexit Could Make Your House Worth More.”  The author, Chris Matthews, argues that Britain’s decision to leave the EU could mean higher real estate prices for the U.S. 

According to Matthews, as the Brexit vote result sent U.S. Treasury yields tumbling it will also exert a downward pull on 30-year fixed mortgage rates.  This in turn will make U.S. real estate more attractive to investors both foreign and domestic. 

He also quotes KC Sanjay, an economist with Axiometrics, who said, “International investors have been increasing their holdings in the U.S. over the past several years, as they have gained a better understanding of the American apartment market and an appreciation of the sector’s profitability.”  This means, says Matthews, that investors are primed to view the U.S. real estate market as a favorable alternative to the London market.

British property investors have indeed taken a blow in the wake of the Brexit vote.  It was reported earlier this month that three financial firms stopped trading in their respective U.K. commercial property funds on the heels of a “rapid increase” in investors trying to sell their holdings.  The move was cast by the financial press as a “temporary measure” to help avoid another credit event like the one seen in 2008.  It further underscored the exodus out of overseas property holdings and the corresponding increase in U.S. real estate demand.

A further incentive for foreign investors to increase their financial exposure in the U.S. is provided courtesy of U.S. government rules easing the tax burden on foreign real estate investments.  A non-U.S. investor, for instance, can now own up to 10 percent of a REIT before incurring federal taxes.  That percentage is up from 5 percent prior to the new rule being implemented in December 2015.  As is normally the case, federal policy is paving the way for a future asset craze. 
In a recent issue of The Campbell Real Estate Timing Letter (, real estate timer extraordinaire Robert M. Campbell points out that U.S. housing prices should continue appreciating based on several fundamental factors.  Campbell notes that the current market is still appreciating at a vigorous inflation beating pace of over 3% per year, and the data suggests real estate has continued upside potential.

He also points out that the momentum behind the CoreLogic Home Price Index increased by 6.7% year-over-year in March 2016.  Momentum increases in this index have historically been followed by additional upside in U.S. housing prices in the months ahead.  Moreover, the U.S. home ownership rate has plummeted to its lowest level since the 1960s as more and more Americans are renting.  When adjusted for population growth, the supply of homes to rent hasn’t been keeping up with demand which means more units will have to be built.  This is but one facet of the strong real estate sector performance this year. 

Most of the increasing demand for property is coming not from the middle class, as was the case in the previous real estate run-up, but from the upper middle class.  The greed of gain and the inveterate tendency for the upper middle and upper classes to ostentatiously display their wealth is translating into a race to build the biggest house.  This in turn is one of the driving forces behind the expansion in the U.S. residential real estate market.  Below is a graph of the Case-Shiller 20-City Composite Home Price Index showing the steady increase in home prices since the 2010-2012 market bottom.

No socioeconomic class is immune from the inexorable pull of runaway greed, and no class ever fully escapes punishment from extreme greed.  As the upper middle class emerged relatively unscathed from the housing bust aftermath, it remains for them to be drawn into the vortex of real estate mania before the next big housing bubble expansion and subsequent collapse occurs.  In the end, they too will endure much the same fate as the U.S. middle class in the years since the last housing bust. 

Thursday, July 7, 2016

Why the bears should be scared

The last year has been a scary time to be an investor.  In 2015, the slowdown in China’s economy caused undue apprehension to investors and contributed to a nausea-inducing rollercoaster ride which began last July and has continued until now. 

By the end of 2015 low energy prices were taking a toll on the high yield debt market, which in turn catalyzed another stock market swoon.  Although the decline wasn’t severe, the January 2016 market panic ended with the biggest spike in bearish investor sentiment since the 2008 credit crash.  This reflects the pronounced tendency among investors to panic at the slightest hint of danger, a spillover effect from the historic 2008 crisis. 
Added to the concerns over China have been the endless scares over the euro zone economy.  Beginning with the spill in January, investors have had one concern after another concerning the stability of Europe’s transnational economy which in turn has resulted in periodic financial market turbulence.  More recently, Britain’s exit from the EU has cast an additional pallor over the euro zone outlook and introduced even more volatility to the stock market. 

Yet to those who pay attention to stock market internals it should be clear that a change in the market’s character began in January and has gradually shifted the main internal trend.  Last July the market was plagued with a surfeit of stocks making new 52-week lows on the NYSE and a dearth of new highs.  This problem continued to fester throughout the summer of 2015 until finally the market could no longer hold its level and collapsed under the weight of the internal selling pressure last August. 

Even after the August 2015 bottom and subsequent recoil rally the new 52-week lows never entirely dried up.  As the major indices rallied to their all-time highs in the bounce-back, the new lows once again increased.  It wasn’t until after the bottom in February of this year that the new lows contracted and fell below 40 on a daily basis to confirm that the market’s internal health was finally improving.  Except for a handful of instances, the new lows have remained steadfast under 40 since then.  The new 52-week highs have also greatly outnumbered new lows since the February bottom. 

The reversal in the market’s internal character has allowed the market to reverse the downside internal momentum that was a staple of last year.  This has allowed the market to build a positive internal momentum structure which is reflected in the following graph. Shown here is the Hi-Lo Momentum (HILMO) rate of change indicators which reflect the market’s positive internal momentum currents.  Note in particular the nearly vertical path of the dominant intermediate-term momentum indicator (circled).  This is a veritable needle in the backside of the bears each time they attempt to raid the market.  FYI, one year ago the chart looked the opposite of what it does now. 

What this means is that the overall path of least resistance for stocks is to the upside.  It doesn’t guarantee a smooth flight path for stocks, of course.  But since February it has meant that sell-offs have been short-lived due to the refusal of the market to stay down for very long.  It has also meant that bears have had a frustrating time due to the tendency for the periodic selling panics to reverse quickly and feed on intense short-covering. 

Another indication which doesn’t augur well for the bears in the longer-term is the bond market outlook.  Not only are 10-year Treasury yields at record lows, a favorable development for the longer-term financial market, real estate and overall economic outlook, but corporate bonds are showing tremendous strength vis-à-vis a year ago.  Below is the chart of the Dow Jones Corporate Bond Index.  This reflects the increasing demand for high-quality corporate debt; the trend was much weaker in the spring and summer of 2015, but has since turned a corner and is making new highs.  Historically, rising corporate bond prices have eventually presaged stronger equity prices. 

Moreover, the comparative yield spread between the yields on Dow 30 stocks and 10-year Treasuries is as wide as it has been in years in favor of Dow yields.  Last year the spread was at times non-existent as Treasury yields were sometimes higher than the yields on Dow 30 stocks, which argued against owning equities.  Now the situation has been reversed and argues strongly in favor of longer-term stock ownership.

For the last year the S&P 500 has been stuck in a lateral trading range.  In many ways this resembles the range-bound market of 2005, which was also characterized by positive internal momentum.  Yet the 2005 stock market was frustrating for the bulls in that the market clearly wanted to take off but was kept range-bound until finally breaking out emphatically in 2006.  Then, as now, the bears were emboldened and are licking their chops for the opportunity to score big on the next “big short.”  But given the market’s buildup of positive internal momentum over the last several months, they should carefully rethink their longer-term strategy.  If the market’s trading range proves to be consolidative rather than distributive, they are apt to be in for a nasty surprise after November’s presidential election. 

For now, the see-saw battle among bulls and bears continues with neither side enjoying a distinct intermediate-term advantage.  The longer the market’s internal momentum profile continues improving, however, the more likely the bears are to be eventually disappointed in the longer term.  The trading range, along with its intermittent turbulence, may have a few more months to run before a post-election upside breakout is finally made.

Many investors may express doubt or even frustration at the proposition that the bull market which began in 2009 could continue another one, two or even three years further.  The frequent protestation that this bull market is “long in the tooth” is heard both loud and often among the doubters.  And why should it continue, they reason?  For what possible purpose could be served by having the market push higher without a significant setback, lo, these last seven years?  The answer is readily apparent if one merely examines the question from outside the pale of conventional thinking.

Whenever there is a question of motive involving the financial, political and economic destinies of the nations, the single best source for discovering the philosophical basis behind these actions is the great political theorist, Niccolo’ Machiavelli.  Machiavelli has supplied posterity with perhaps the broadest, finest survey of Greco-Roman history from which every possible political outcome from any event can be derived.  His great masterwork is The Discourses on Livy, which distills the great lessons from a thousand years of Roman history into a single tome. 

One theme he emphasizes is the constant clash at all times in history between the moneyed ruling class and the great masses of freemen.  Concerning this clash he writes, “For without doubt, if one considers the respective aims of the nobles [upper class] and the populace [middle class], one sees in the former a strong desire to dominate, and in the latter merely a desire not to be dominated.” 

The above sentence provides the reason for most of the discord in the political and economic life of any nation.  It can also be applied to the motives of those heavily involved in the financial markets, for the great game of the stock market is nothing if not a desire among the dominant players to fleece the less-dominant participants through tricks, ruses and stratagems.  It stands to reason then that successful speculation for the outsider consists chiefly in the ability to recognize these tricks.

“In most cases,” Machiavelli says further, “discord [i.e. crashes, panics, and depressions] is caused by those who possess, because the fear of losing generates in them the same desires as those who wish to acquire.  Men do not feel their possessions secure if they do not also acquire the possessions of others.  And the more they possess, the more power and capacity they have to cause turmoil.  Furthermore, their improper and covetous behavior ignites in the hearts of those who do not possess the urge to avenge themselves and rob those who do, gaining the wealth and honors that they see so badly misused by others.” 

The above statement can be applied to the present bull market and explains why it must continue until the end game strategy among the dominant players is complete.  It has been observed that secular bull markets end only when the greatest number of outsiders (i.e. small players) enters the market as indiscriminate buyers of stocks.  For the dominant players must have someone to sell to and, as they cannot unload their vast holdings amongst each other, large scale participation among smaller investors is required to complete their final strategy. 

Consider that the end game of the previous bull market was the 2008 credit crash, which dealt a grievous blow to the U.S. middle class from which it has yet to fully recover.  With millions of middle class Americans dispossessed of their houses and stock holdings, what fruit could possibly be left for the dominant players to pick?  The answer is found in a news item on 

“America’s upper middle class is larger and richer than it’s ever been, controlling about 52 percent of the country’s income.  The share of households earning between $100,000 and $349,999 for a family of three doubled from roughly 13 percent of the population in 1979 to nearly 30 percent in 2014.  The middle class accounts for 32 percent of the population and controls 25.8 percent of the income.”

My late mentor, Samuel J. Kress, was of the opinion that most of the major financial market calamities and debt busts are largely fueled by the upper middle class.  According to his thinking, they are the economic class which is the most aggressive in trying to become rich.  Upper middle class investors are close enough to the upper class that they can “taste it”, and so they undertake undue risks in their attempt at reaching the next level.  When they fail, the result is credit crises and market crashes.  Those who are comfortably middle class, by contrast, are much more likely to remain content with their lot and are more risk averse by nature.  

Since the upper middle class emerged from the 2008 credit crisis aftermath relatively unscathed, it’s clear that they will be targeted by the dominant players in the run-up to the next major crash.  As the conditions for a major crash aren’t yet fully developed, the bull market must continue until those conditions have been prepared.  Upper middle class investors, moreover, must become committed participants in the stock market much as middle class investors were in the run-up to 2008.  Until this happens, the bull market should be assumed to be yet still alive. 

Friday, July 1, 2016

Clif Droke in Traders World magazine

Traders World, the leading magazine on Gann, Elliott Wave and technical analysis, has published an article by yours truly on page 120.  The article is entitled, "Trading Range Psychology and the Great Malaise." Traders World issue #63 is now in circulation and you can view the article for free by visiting the following link: