Big Moves are coming

I follow four areas of the market very closely; volatility, miners, gold, and the SPY index, and everything smells of deflation.  I trade on the 2 and 4 hour, but I took a step back and looked at the monthly, weekly, and daily charts and everywhere I look it smells of lack of oxygen.

The broad market has a decreasing positive slope (8% y-t-d), and why not, you cannot continue to have 10-14% (from 2014) annualized growth rates with no GDP, Income, or fixed income rates.  The charade started with a relative yield trade, then a squeeze volatility trade, and now we are wrapping up the leverage the balance sheet trade.  The Central Banks and politicians have done everything except the right thing, and maybe because the  right thing is the hard thing.

As far as I can tell deflation is taking root everywhere in the world, and that makes raising prices very hard, and realistically, I believe in the short term, employers cannot really chop until and unless revenues start to fall in earnest.  They are losing all of their variable expenses to exploit, and are sitting on increasing amounts of debt.  If Yellen increases rates (which I have serious doubts she will), the carrying costs of that debt becomes increasingly material.

Bull markets are not made of these.

The charts are bearing me out, SPY is stuck in a range, where the algos are torturing the short sellers, but there are no marginal new buyers.  Margin debt is maxed, retail traders are all in, and the Central Banks has stopped giving the banks new casino money.  Using wedge break mathematics, 900 on SPY over the next 18 months is a distinct possibility.

Biotech cannot get out of its way, and I believe that bubble has burst, and will retrace all gains.  80% of all firms in the index have negligible revenue, and are simply burning investor cash.  Good night. Social Media is showing  that expectations far exceed growth, and the punishments are beginning. Gold has never bought the inflation story, and my expectations are a hard move down, same for the miners.

Enjoy the charts.

Musings

Last week, I thought gold and NUGT would rise, and it did, but not impressed with the move, and it looks likely to fail.  I am staying away from it this week.

SPY is being capped pretty hard by the 161 fib line from the 09 bottom and it is trading back and forth in a range, and now a wedge.  Friday was interesting as 40 points from Thursday's high evaporated like it was nothing.  Any real selling could cause some grief for the markets.

I don't know about you, but does anybody believe that the Fed will raise interest rates anytime in the near or far future?  We are triple zero; rates, wages, and GDP.  I think the Fed is out of bullets, and the Govt is stuck as there is no way the Republicans are going to allow pump priming going into a national election.  Plus, I seriously doubt the Fed will allow the politicians to paint a bogey on their back blaming them for the economy due to rate increases.

Therefore we will see input costs continue to collapse, and I am pretty sure we will see thirty year no cost mortgages in the twos before the next elections.

Finally, I appreciate all of the support and new clients with the stock signals.  They performed very well.  I am now in the process of adding a long volatility signal, NUGT/DUST, SPY, and TNA/TZA. I will be testing for the next few weeks, and release some time in May.  My plan is to keep the price the same for all new subscribers for these additional signals, and keep the price locked indefinitely for those who are subscribed by June 30. I also may cap it at 300 subscribers to keep it manageable. The price is about a 1000 share commission, a month ($12.50.  The program creates the signal and immediately forwarded to you via text through Twitter.  This is the best deal in stock education.  No guessing, no pontification, just math. You can sign up at the top right.

Ok, here are a few charts, enjoy.

I Finally Did It

After many years of desiring to complete an end to end signal that automatically communicates my buy and sell signals triggered by my program within my trading software, I finally did it. It took some clever programming but now I can instantaneously send a text message with clear instructions the moment my software signals it.

My first signal is my bread and butter volatility signal set on the 30 minute, hourly and four hourly, offered based on investors time horizons.  I use SVXY as the symbol, but in using the signal to make profitable trades, you can interchange with XIV, UVXY, and VXX.  For example, if you get a buy 4 hourly SVXY, you can buy XIV or SVXY, or buy UVXY or VXX puts.  What I don't recommend is to use a sell signal to go long volatility.  It does not work consistently enough.  There is another signal I use that I have not released yet.

For full disclosure I only trade the four hourly, and I am up 47% since January 15th with no margin. Other investors trading the hourly have had success using options.  Remember, these are high probability set ups not perfect picks, to be successful you must trade every signal, as you will lose two out of ten times.  But these are here for your education as I can't hope to know your goals and financial condition.

If you look to the right, you can sign up and receive the signals.  I priced it to make it affordable to everyone, yet allow me to recoup my time and costs to maintain and improve it over time.  I want to thank my beta testers in helping me make this a very nice offering.

Now to the week ahead.

The Charts Speak

Short Term Top?

First about last week.  All my trades were profitable and are closed (see last blog post).  First off the signal is working beautifully, and enough traders believing the lie that the Fed is ever going to raise rates just made it easier.

This week, the signals have me in watch and wait mode, with a very interesting pattern in IBB that bears watching.

My automatic SVXY hourly trade signal is being beta'd right now, and the feedback has been favorable, with some great suggestions to improve performance.  We will test for sixty day to get enough data points, and to continue to reduce any latency in the signal, and any slippage due to time to delivery. Both are solvable and are being engineered into the program.

My $50,000 to $1,000,000 trading only volatility challenge in five years is ahead of schedule.  I attached the graph for review, and will continue to post the trades live.

Enjoy the charts.

Thinking It is an Up Week

Ah Movement

OK, I two of the three directions right but made three winning trades.  Long Vix, short SPY, and when gold failed the breakout on Monday, I shorted and covered on Friday.  My new thoughts are in the charts below.  Enjoy.

Not Much Cooking.

I am just waiting on a pullback in the market, although Gold is looking decent.

$50K to a $million in 5 years on track.

On January 1st I made a commitment to trade only volatility long or short with no leverage using my one hour/4 hour signal.  So far this year I am already up 26% for the year. All my trades are posted real time on my #bobloveshawaii Twitter site.  It's free to follow.  Just so you know,  I traded Vol successfully for years, now concentrating on it as it is very profitable.

I am working on two more signals to share after I trade them through a cycle and the back testing pans out.  They will be for gold and for SPY reversal system.  Stay tuned.

Right now I am in all cash, as the four hour maxed out and the hourly topped and rolled over.  My view is another short vol set up is coming before we can buy vol long again.

Here are my charts and results.  Enjoy.

A Really Nice Project

It is not often you can invest in a property that borders a city that has halted all new construction, and we also get to collateralize not just the land but additional lots.  This project has already started selling phase one, has 30 some remaining lots/homes to sell, selling approx 3 a month, and is now ready to prepare the dirt on phase two.  The cool thing is as they sell those lots/homes in phase one, they buy down our loan at a 1.1 to 1 ratio.  Very good collateral coverage at 69% loan to cost, and high 50's loan to value.  Short term, max is one year.  They will then finance the next phase of construction and pay off the remainder of this loan.

Ping me at bkudla@ignitefunding.com for more info and risk disclosures.  We will fund this loan by the 30th.

This Captures My View completely

From Zero Hedge

Submitted by Paul Mylchreest of admisi.com

Exter’s Pyramid “in play” (and is Martin Armstrong right?)

In a global debt bubble, it concerns us when the benchmark debt security still looks good value, albeit on a relative basis.

Source: Bloomberg, ADMISI

In spite of this, the consensus is (once again) calling for higher US yields and FOMC “lift off.” The two-year Treasury yield has been pricing in the latter…

Source: Bloomberg, ADMISI

…but the question is what is the long end of the Treasury curve pricing in?

Slower growth and lower inflation, most likely. Risk of global contagion, possibly. That the FOMC makes a mistake (in raising rates)…maybe that too.

The Fed might be desperate to raise rates ahead of the next downturn (how embarrassing not to) but this analyst would be surprised to see more than 1 or 2 token 0.25% increases – and that’s if things are rosy.

As we know, the narrative from central banks can change at the slightest hint of trouble, e.g. Ballard’s QE4 comment during last October’s selloff. Watch the spin as the Fed portrays lower energy prices as “transitory” and no reason to alter its desire to tighten, while the ECB’s desire to ease only grows, even though neither is achieving its mandate on prices.

Do what thou wilt shall be the whole of the law?

The key point is that you can’t normalise rates in the “Winter” phase of a long wave (Kondratieff) cycle. There is just too much debt. It’s debt that drives these cycles and eventually brings them to an end.

This is the fourth cycle since the Industrial Revolution and the longest by far. The lack of a gold standard has allowed the central banks to extend it through unprecedented credit creation.

Here is our timing of these cycles:

1788—1843 56 years

1844—1896 53 years

1897—1933 37 years     (1937 was a policy error when recovery established in our opinion)

1934—?        81 years    (and counting)

The next cycle doesn’t begin until the excess debt from the previous cycle has been purged. Historically this has occurred via debt deflations of varying length and severity. In a world of unlimited credit creation, inflating the debt away remains an option and we question whether renewed onset of debt deflation will ultimately be dealt with via central bank-created inflation? Mr Abe and Mr Kuroda are conducting such an experiment.

In the meantime, we see a possibility that the Fed could raise the Fed Funds rate in several months’ time only for long-term Treasury yields to continue their decline, while the ECB could instigate sovereign bond QE and long term sovereign yields (ex-Germany certainly) could rise…which was the experience of the US (QE1, QE2 and QE 3 pre-taper).

Talking of flattening yield curves…

We’ve been looking at yield curves in the run up to the last two peaks in the S&P 500 in March 2000 and October 2007.

It basically doesn’t matter which part of the Treasury curve you choose in terms of 2s, 5s, 10s and 30s, but spreads declined to roughly zero, or negative, prior to the equity market peaks.

Here is the 2s10s...

Source: Bloomberg, ADMISI

The 2s30s...

Source: Bloomberg, ADMISI

The 5s10s.

Source: Bloomberg, ADMISI

And the 5s30s, although we could have added the 2s5s and 10s30s just for the hell of it.

Source: Bloomberg, ADMISI

Could the same thing happen again in a structurally (much) lower interest rate environment this time around?

Well 190 bp of flattening in the 2s30s might be pushing it, but 46bp in the 5s10s is certainly possible in the fairly near future with the way things are going. Funnily enough, if the 10-year Treasury yield was in line with the 10-year Bund, the 2s10s spread would be -8bp, i.e. close to zero.

While we expect the S&P to be lower at the end of 2015 than the beginning of 2015, our point is that more flattening might be in order prior to a major correction in equity markets like the S&P 500, Footsie, DAX,, etc. In general terms, it also suggests that it might be too early to lose faith in “bond proxies” such as Utilities and some Consumer Staples.

A significant further flattening in the curve is looking increasingly more likely...

Indeed, the major story for us right now is that the broad concept incorporated in “Exter’s Pyramid” is in operation. This something we mentioned in Autumn last year and it’s occurring across currency and credit markets and, to some extent, in equities.

To recap, John Exter (a former Fed official, ironically) thought of the post-Bretton Woods financial system as an inverted pyramid resting on its apex, emphasizing its inherent instability compared with a pyramid resting on its base. Within the pyramid are layers representing different asset classes, from the most risky at the top down to the least risky at the bottom.

He foresaw a situation where capital would progressively flow from the top layers of the pyramid towards the bottom layers.

“…creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid…Creditors will try to get out of those weak debtors & go down the debt pyramid, to the very bottom."

Below is his drawing of the inverted pyramid as he saw it in the late-1980s, when the riskiest assets were Savings & Loans (“thrifts”), Third World debt and (relevant to today) junk bonds, etc.

We think that Exter’s Pyramid went “live” in in late-June/early-July 2014 when the dollar index (DXY) began to strengthen…

Source: Bloomberg, ADMISI

…along with junk spreads.

Source: Bloomberg, ADMISI

The perfect illustration of Exter’s Pyramid is across the credit markets (as seen via ETFs) with capital flowing from HY through IG…

Source: Bloomberg, ADMISI

…and from IG into Treasuries.

Source: Bloomberg, ADMISI

There is some evidence that this is happening intra-equity market.

For example, here is the chart of the S&P 500 High Quality Index versus the Low Quality Index, where “Quality” is measured in terms of growth and stability of earnings and dividends.

Source: Bloomberg, ADMISI

The point about Exter’s Pyramid is that there is a large amount of capital in riskier financial assets in the upper layers of the pyramid which can flow downwards.

Consequently, the valuations of perceived “safe” assets could obviously overshoot if there is no let up.

Capital flows into dollar assets are a major part of this process right now.

We haven’t mentioned Martin Armstrong’s “Economic Confidence Model” (ECM) for quite some time but we’ve been thinking about it recently. The ECM, based on 8.6 year cycles, is often very successful at tracking turning points in the “hot money” flow of global capital.

Now is not the time for a detailed explanation, but for anybody not familiar with the ECM, Armstrong’s report “It’s Just Time” (google it) from several years back is one of the best we’ve ever read and provides excellent background.

The ECM’s peak on 2007.15 (i.e. late-February 2007) picked out the emergence of the sub-prime problems almost to the day. It did the same with the peak in the Nikkei Index in December 1989 and, we know this because we checked, the Great Crash of 1929 (which was 7 x 8.6 years back from the Nikkei’s peak). The 1987 crash was an intermediate peak in the cycle which ended in 1989.

What is fascinating is that the current ECM cycle peaks on 2015.75, i.e. at the end of September this year. The low point of this cycle was 2011.45, i.e. June 2011 which Armstrong refers to as:

“The 2011 bottom was the peak in oil and gold and the start of the breakout in stocks and the beginning of the Euro Crisis in full bloom.”

In contrast, we think that the 2011 low in the ECM marked the low in the dollar…here is the DXY again back to 2010.

Source: Bloomberg, ADMISI

Furthermore, the intermediate peak of 2013.60 (July 2013) and the intermediate low of 2014.68 (early-September 2014) also align quite closely with the dollar, as is obvious from the chart.

Armstrong is talking about this September 2015 being the peak in the “bond bubble”.

If our interpretation is correct, the dollar AND long-term Treasuries could have further strong upward moves between now and late-Summer 2015.