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Yesterday, when reading the latest note by JPM’s “Gandalf” head quant Marko Kolanovic, we noted something strange: for the first time we observed a JPM quant not only commenting on such sensitive topics as social fairness, but daring to challenge the oligarch orthodoxy implying that Buffett is wrong that “the babies being born in America today are the luckiest crop in history.”

This is what he said:

While we do not take either a glass half-full or glass half-empty view on the current state of US economy, there are good reasons to believe that ‘the luckiest generation in history’ statement is overly optimistic. US primary results show a very strong lead for D. Trump in the Republican Party, and a surprisingly good showing for B. Sanders. We believe this indicates that a significant part of the electorate disapproves of the current political establishment and feels left behind by the new economy (e.g. voters may not agree with W. Buffet that an average upper-middle class American today has a better living standard as compared to John D. Rockefeller Sr.).

Since the opinion of Kolanovic’s boss Jamie Dimon – if only that for public purposes – is largely a carbon copy of Buffett’s, we hope this rare statement of truth from a banker does not cost Kolanovic his job, especially since his uncanny insight and abilities to time market inflection points have made him almost as invaluable to stock pickers as Gartman (the latter, by batting a solid 0.000, is arguably the most irreplaceable voice on Wall Street today).

Insight such as this, on who is buying and selling this bear market rally:

Since mid-February, the S&P 500 has staged a meaningful rebound. Similar to the market rally in October 2015, systematic strategies had an important role in both the January selloff (here) and February rally (Figure 1).  

 

Short term equity momentum (1-month) turned positive around the 1930 level and 6m momentum turned positive a few days ago. This would have resulted in CTAs covering most of their short equity exposure and inflows in $50-70bn (also confirmed by the equity beta of CTA benchmarks). The market moving higher also changed the index option (gamma) imbalance and resulted in daily hedging flow that suppressed realized volatility. Lower realized volatility in turn led to some (albeit smaller) equity inflows into Volatility Targeting strategies (~$10bn) and Risk Parity strategies ~$10-$20 bn. All In all, over the past 2 weeks, equity inflows from systematic strategies totaled around $80-$100bn. Taking into account the low liquidity (S&P 500 futures market depth) and assuming that total equity market depth is ~4 times that of futures (including stocks, ETFs, and options), we estimate that more than half of the market rally in the second half of February was driven by these systematic inflows. Another likely significant driver is the rally in oil prices over the past 2 weeks.

… and that, as we showed, and as UBS confirmed last Thursday, has been entirely a function of an epic short covering squeeze.

So now that we know who drove the rally, here – according to Kolanovic – is what happens next:

What is the fate of this market rally? In terms of technical flows, more inflows would come if 3M and 12M momentum turn positive, which would happen at ~2025 and ~2075, respectively (the precise level depends on the timing of potential moves). If volatility stays subdued, volatility-managed strategies could also increase equity exposure. However, equity momentum is also vulnerable to the downside and a move lower could be accelerated by 6M and 1M momentum unraveling at ~1950 and ~1900, respectively. From the perspective of systematic strategies, downside and upside risks are balanced. However, equity fundamentals remain a headwind. In our recent strategy note, we showed that historically, periods of consecutive quarterly EPS contractions are often followed by (or coincide with) economic recessions (~80% of the time over the past ~120 years). EPS recoveries that follow 2 consecutive EPS contractions (~20% of times) were typically triggered by some form of stimulus (fiscal, monetary or exogenous). We expect market volatility to stay elevated and investors to remain focused on macro developments such as the Fed’s rates path, developments in China, and releases of US Macro data. Elevated volatility and EPS downside revisions will provide a headwind for the S&P 500 to move significantly higher (via multiple expansion). While investors need to have equity exposure, we think there are better opportunities in Value stocks, International and EM equities (as compared to broad S&P 500 exposure)

Which probably also explains why late last week JPM’s head strategists went underweight stocks last week “for the first time this cycle“, while urging clients to buy gold.

via Zero Hedge http://ift.tt/1QDWzqr Tyler Durden

By EconMatters

It has been a bad 4 years for the Canadian Dollar versus the Greenback. It is trying to make a recovery as of late as the price of Oil is off the bottom, but if Oil takes another leg lower, this could spell more pain for the currency.

© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle   

via Zero Hedge http://ift.tt/1LKhP0S EconMatters

Submitted by Claire Bernish via TheAntiMedia.org,

Legislators in Mexico City passed a proposal on Thursday to bar presidential candidate Donald Trump from entering the country.

Though the proposal amounts to a tellingly symbolic gesture, the lawmakers hope the measure will pressure Mexican President Enrique Peña Nieto to take a more adamant stand against Trump’s xenophobic rhetoric — including his blanket characterization of Mexican immigrants as ‘rapists and criminals.’

“What we’re saying is that if he wants to build a wall so that Mexicans can’t enter his country, then he is not welcome in our country,” Manuel Delgadillo explained to WorldPost.“What we need now is for President Peña Nieto to make a strong statement condemning Mr. Trump’s anti-Mexican comments.”

Delgadillo also said the Mexico City legislators were concerned with the billionaire’s “hyper-nationalist” dialogue, which has stoked anti-Mexican sentiment throughout the United States.

Deputy Víctor Hugo Romo of the Revolutionary Democratic Party — the politically left political party responsible for the proposal — compared Trump to Hitler, calling him “primeval, egocentric, and primitive.”

“Hitler was very popular,” Romo said, reported MSV Noticias. “He generated a lot of sympathy by adopting nationalist politics that vindicated the Germans’ sense of self-worth. [Trump] is practically a copy. I consider Donald Trump a chauvinist, a misogynist who fosters and leans toward repression … He doesn’t respect diversity.”

Trump’s demagoguery has also been recently condemned by two of Mexico’s former presidents.

Felipe Calderón denigrated Trump’s anti-immigrant policy for its transparency in not being aimed at immigration, per se, instead saying “he is talking about migrants that have a different color than him — and that is frankly racist.” He sharply cautioned that Trump “is turning the United States into a neighbor that we’re all going to end up rejecting and hating.”

In interviews, Vicente Fox called Trump “crazy” and a “false prophet.” He also repeatedly stated, referring to the candidate’s proposal that Mexico must fund the building of a wall along the U.S.-Mexico border, “I’m not going to pay for that fucking wall … He should pay [for] it … He’s got the money.”

He added that “Democracy cannot pick crazy people” who don’t “know what’s going on in the world.”

However, the remarkably tabloid-esque field of presidential hopefuls for the 2016 election would appear to evidence exactly that.

via Zero Hedge http://ift.tt/1X57b5M Tyler Durden

There is perhaps no more perverse relationship in the world than that which exists between the West and Saudi Arabia – or, “the ISIS that made it,” as Kamel Daoud, a columnist for Quotidien d’Oran, and the author of “The Meursault Investigation” calls the kingdom.

We’ve been over and over the glaring absurdity inherent in the fact that the US and its partners consider the kingdom to be an “ally” in the fight against terrorism and you can read more in the article linked above, but the problem is quite simply this: the Saudis promote and export an ultra orthodox, ultra puritanical brand of Sunni Islam that is virtually indistinguishable from that espoused by ISIS, al-Qaeda, and many of the other militant groups the world generally identifies with “terrorism.”

Wahhabism – championed by the Saudis – is poisonous, backward, and fuels sectarian strife as well as international terrorism. That’s not our opinion. It’s a fact.

But hey, Riyadh has all of the oil, so no harm, no foul right?

Even as the very same ideals exported by Riyadh inspire the ISIS jihad, the kingdom is so sure it has the political world in its pocket that it sought a seat on the UN Human Rights Council, even as the country continues to carry out record numbers of executions.

They even had the nerve to establish what they called a 34-state Islamic military alliance against terrorism in December. Of course the members don’t include Shiite Iran (the Saudis’ mortal enemy) or Shiite Iraq, both of which are actually fighting terror rather than bombing civilians in Yemen and engaging in Wahhabist proselytizing.

But while everyone in the world is well aware of just how silly the “alliance” is, the farce will apparently continue as French President Francois Hollande on Friday awarded Crown Prince Mohammed bin Naif France’s highest national honor, the Legion of Honor for “for his efforts in the region and around the world to combat extremism and terrorism.”

This is the same Francois Hollande whose country was attacked not four months ago by fighters inspired by the very brand of Islam the Saudis teach. 

This would be like pinning a Blue Ribbon on Kim Jong-Un for his efforts to promote sanity and maturity in international relations.

There are no words.

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Via Dana Lyons' Tumblr,

The Value Line Geometric Composite, which broke critical support in early January leading to an immediate 12% drop, has climbed all the way back to the breakdown level.

The Risk Model that orients our investment posture utilizes market inputs other than simply price in its construction. However, if we were to choose one price plot to guide our investment decisions, it would most certainly be the Value Line Geometric Composite (VLG). The VLG, as we have explained many times in these pages, is an unweighted average of approximately 1700 stocks. Thus, in our view, it serves as the best representation of the true state of the U.S. equity market. It has also historically been very true to technical analysis and charting techniques which is quite remarkable considering there are no tradeable vehicles based on it. And it has been remarkably accurate of late in offering guideposts for trading this market – something to keep in mind based the current level of the VLG.

Consider some of our posts this year focusing on the VLG:

January 6:  “BREAKING!: The Bull Market?”

 

The VLG breaks what we had labeled the “pass/fail” line around 436, signified by a cluster of key Fibonacci Retracement lines stemming from the major post-2009 bull market lows. The break of this level, besides perhaps dealing the fatal blow to the cyclical bull market, opened up an immediate 12% of further downside to the 382 level.

 

January 20:  “UPDATE>>Just 2 Weeks After Breakdown, Key Index Hits Ground Floor”

 

Just 2 weeks later, the VLG tags the 382 level. This level, signified by the next sequential Fibonacci Retracement levels, also proves to be accurate, not only as a magnet but as support. The index would test the level again in February, ultimately forming a closing low of 383.82. From there, it has bounced, just as it was drawn up.

 

February 23:  “Is The Stock Rally Glass Half Full Or Half Empty?”

 

About 8 days into the February bounce, the VLG came to a crossroads halfway between the 382 and 436 level. The area included several potential points of resistance; however, based on some of the proprietary indicators that we track, there were suggestions that the rally was not over and that the VLG could push through the potential resistance. Based on that, we surmised that the VLG glass was half full and the index was more likely to rally another 6% to the 436 level than it was to visit 382.

Fast forward 8 more days to today and we find the VLG hitting a high of 437, confirming our short-term inclination and recovering all the way up the elevator shaft to where it broke down on January 6.

Short-term view:

 

Long-Term view:

 

So what now? Well, after rallying 14% in just about 3 weeks, a ratcheting down of upside expectations would certainly seem warranted. Sure, the VLG has favorable momentum here and the indicators we track are still pointing positive, so there could very well be some overshoot to the upside. However, considering how spot-on the VLG’s chart levels have been in marking turning points, it would seem wise to continue to pay some heed to the levels.

Furthermore, if you hold the view, as we do, that the stock market has entered into a cyclical bear market, the upside to any bounce may be capped. Thus, while the VLG has climbed from the ground floor all the way back up the elevator shaft, it may find the access to upper floors there rather limited.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

via Zero Hedge http://ift.tt/1TBUZvx Tyler Durden

It was just seven weeks ago when we said the following about Donald Trump and Europe’s increasingly intractable migrant crisis: “Europe’s worsening refugee crisis is in many ways the best thing that could have happened to Donald Trump’s Presidential campaign.”

The rationale behind that comment should have been obvious, but just in case it’s not, here’s the argument. Trump is campaigning on a lot of things, some of them so incoherent that we’re not entirely sure how to go about describing them, but one key part of his “platform” is a strong border.

“We either have a country, or we don’t folks,” he’s particularly fond of saying.

In the first week of his official candidacy, he made America’s porous border with Mexico a key element of the “Trump stump” – if you will – whipping supporters into a frenzy with stories about drug runners and Mexican rapists. His solution: build a wall.

Well it so happens that just a little over two months after Trump made that suggestion, that’s exactly what Hungary’s Viktor Orban did when the daily flow of Mid-East refugees over the Serbian border rose well into the several thousands. Not to put too fine a point on it, but the wall idea seems to work. Here’s a look at the dramatic decline in migrants entering Hungary after Orban’s razor wire fence was constructed:

Initially that move was seen as cruel and Orban was cast by some as a kind of first European mover in the effort to strip away refugees’ basic human rights in the name of preserving Western Europe’s “Christian heritage.”

Fast forward nine months and the mood has changed. Dramatically. Fears of terrorism, rape, assault, and rampant violence plague everyday life for many Europeans and more European equivalents of Trump’s Mexican border wall have been erected in countries other than Hungary.

In many ways, Trump is the leader many Europeans want, even though most would never say so aloud as it flies in the face of everything the bloc is supposed to stand for and recalls the region’s rather uncomfortable past.

Trump has been called a populist, a nationalist, and at worst, a fascist. All of those movements are once again on the rise in Europe largely as a response to the refugee crisis (just look at PEGIDA, and the Soldiers of Odin). Of course there are still those Europeans who find Trump repugnant – the antithesis of an Angela Merkel.

CBC is out with some interesting commentary on all of the above.

“As hundreds of thousands of asylum-seekers continue to land on Europe’s shores, and as an opposing sentiment rises, for some, Trump’s sturdy wall can’t be built here quickly enough,” Foreign Correspondent Nahlah Ayed writes. “The Republican leadership contender’s tough talk on migration, on Muslims, and on Europe’s approach to both, is giving Trump strange but tangible traction on the non-voting side of the Atlantic.”

Here, for instance is what Jean-Marie Le Pen tweeted late last month:

Si j’étais américain, je voterais Donald TRUMP… Mais que Dieu le protège !

— Jean-Marie Le Pen (@lepenjm) February 27, 2016

And then there is of course the incomparable right-wing Dutch politician Geert Wilders (see more on Geert here), who said this:

I hope @realDonaldTrump will be the next US President. Good for America, good for Europe. We need brave leaders. http://pic.twitter.com/FWJSaQdClM

— Geert Wilders (@geertwilderspvv) December 7, 2015

“The immigration issue and the position he’s taken on Mexico, you know, it resonates with many on the European continent,” Peter Trubowitz, director of the London School of Economics’ United States Centre told CBC. “They’re worried about immigration, worried about refugees and it’s probably no surprise that Le Pen endorsed Donald Trump.”

On the other side, are those who say Europeans that support Trump are just as misguided as the Americans who have pledged their vote to the bellicose billionaire. Here’s the front page of last month’s Libération. It reads: “the big idiot on the rise.”

And here’s Der Spiegel with the headline: “Madness: America’s Agitator”

Finally, CBC warns that Trump’s affinity for Vladimir Putin has some Europeans concerned that the US may abandon the “losers” (to use what is by now perhaps the most famous ‘Trumpism’) for someone Trump sees more of himself in.

“The potential for ‘President’ Donald Trump, who actually sees more in common with Putin than with perhaps (U.K. Prime Minister David) Cameron or Merkel, is frightening,” Jacob Parakilas, assistant head of the U.S. and the Americas program at London’s Chatham House told Ayed, adding that “Trump is, in some respects, the ultimate caricature of the ugly American in European eyes.”

So, for all the European readers out there we ask: “Idiot, clown, or hero?”

We close with two clips. The first is Trump on Angela Merkel’s migrant policy. The second is the UK Parliament debating a Trump ban.

via Zero Hedge http://ift.tt/1UKOtkZ Tyler Durden

Submitted by John Rubino via DollarCollapse.com,

Suddenly, gold and silver are good again. In two short months, they’ve morphed from targets of derision to shiny new toys on the financial playground.

Not surprisingly, questions have been pouring in from people who kind-of sort-of know the precious metals story and are wondering if they should jump in with both feet. A reasonable response: “If your time frame is the coming decade, sure, go for it. But if you’re thinking in terms of months rather than years, you should be considering entry points and accumulation strategy.”

Which brings us to the Commitment of Traders (COT) report. Most new precious metals investors have never heard of it. And since it seems to be a pretty good indicator of those metals’ short-term price fluctuations, this might be a useful time to define and explain it. So here goes:

Gold and silver prices are set in the “paper” market where big players trade futures contracts that enable them to buy (or require them to deliver) large amounts of metal at some point in the future. There are two main groups in this market: The “commercials,” including fabricators that buy metal and turn it into coins or jewelry and big banks that trade for their clients and their own accounts, and the “speculators” (hedge funds and other institutional gamblers) who use futures contracts to bet on the metals’ price movements.

 

Over and over again, the commercials trick the speculators into piling in or out at exactly the wrong time, thus moving prices in ways that benefit the former. They might, for instance, sell a few contracts into the market when most traders are at lunch or home for the night, pushing the price down and activating hedge fund stop-loss orders. Those sales push prices down further, activating technical signals that cause momentum traders to short the market, producing yet another sharp drop. Then the commercials step in and buy very cheaply — raising prices a bit and leading speculators to go long, pushing prices back up to where the game began. As observers like to say, “wash, rinse, repeat.”

The COT report quantifies who’s long and who’s short and by how much, which makes it a snapshot of how the above game is going.

Here, for instance, is a chart showing what the speculators are up to. When the blue line depicting their long positions and the red line depicting their shorts diverge, that means hedge funds and other traders have been suckered into betting on a gold price surge. When the lines converge, speculators have been fooled into betting aggressively on a decline. The thin gray line is the price of gold. As you can see it tends to do the opposite of what the speculators expect.

What is this chart saying now? Well, the lines have diverged, indicating that speculators are extremely bullish. History says they are now sheep lining up for slaughter, in the form of a gold price correction which forces them to cover at a loss. So — again, based on history — a better entry point for incoming gold investors might be a few months off.

However — and this is a very big caveat — indicators work until they don’t. Someday the paper markets will be overwhelmed by a tsunami of demand for physical metal. The commodities exchanges on which futures trade will run out of inventory and default when too many holders of long contracts demand delivery, and gold and silver will rocket higher. On that day everyone who isn’t fully invested in precious metals will be out of luck.

And some claim that day is at hand. In a recent King World News interview, metals trader Andrew Maguire noted: “Now that we are entering a negative rate world, I am seeing a lot of very large-sized institutional money looking for a home. Some of this money is flowing into gold, and this is confusing technical traders who are battling what looks like a technically overbought gold market…”

So for new precious metals buyers, is it better to get in gradually, using the COT report and other indicators to help define entry points? Or should they ignore the squiggles, stop being cute and just fully commit on the assumption that whatever price they pay today will be dwarfed by what prevails when the system finally breaks down?

There isn’t, alas, a one-size-fits-all answer to such a question. So why bother discussing it? Because it’s interesting. And more information is always better than less.

via Zero Hedge http://ift.tt/1W128D5 Tyler Durden

In a stunningly honest and frank rant, FOX News' Judge Jeanine unleashes anchor hell upon Mitt Romney and the GOP establishment hordes.

She begins:

"There’s an insurrection coming. Mitt Romney just confirmed it. We’ve watched governors, the National Review, conservative leaders, establishment and party operatives trash Donald Trump. But Mitt Romney will always be remembered as the one who put us over the edge and awoke a sleeping giant, the Silent Majority, the American people.

 

Fact. The establishment is panicked. Mitt essentially called for a brokered convention where the Republican nominee will be decided by party activists and delegates irrespective of their state’s choice… You want a brokered convention? A primer Mitt. Whenever we have a brokered convention we lose.

 

Dewey and Ford emerged from a brokered convention to lose the general election. So why? Because the party elites and elders want to protect us and stop of from falling into the abyss?… Most of us working two or three jobs think we’re already in the abyss. The Obama abyss…

 

We are sick and tired of legislators of modest means who leave Congress multimillionaires, whose spouses and families get all the contracts from selling the post offices to accessing insider information so they can buy property and flip it. You’re so entrenched that you’re willing to give Hillary Clinton a win. It doesn’t matter to you which party, crony capitalism and its paradigm will not change for the elite."

And that is just the introduction… Grab a coffee (or something stronger) and watch…

via Zero Hedge http://ift.tt/1Qvn2Zz Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

At the end of January, I discussed the potential for a reflexive rally in the markets and laid out three retracement levels at that time.

“The good news, if you want to call it that, is that the market is currently holding above the recent lows as short-term oversold conditions once again approach. It is critically important that the market holds above that support, which is also the neckline of the current “head and shoulders” formation, as a break would lead to a more substantive decline.”

Here is the same chart updated through Friday’s close:

I pointed out last week that:

“The good news is that the market was able to break above 1940, and the 50-dma, which now clears the way for a push to the 1970-1990 where the next levels of resistance will be found.“

The markets were not only able to push into the 1970-1990 level last week but also complete a 50% retracement from the recent lows as shown above.  The 8% advance from the closing lows just 4-weeks ago has sent “shorts” scrambling to cover pushing stock prices sharply higher.

But does this change any of the recent analysis?

I’M MISSING IT

“OMG!!! I am missing it. Don’t we need to be jumping back in?”

It is not surprising that the recent surge in the markets has awakened the “bullish spirits.” However, that is an emotionally based response to short-term market volatility rather than a decision to increase equity risk based on a defined and disciplined approach.

This goes to the heart of the portfolio management discipline and philosophy. The chart below shows the model allocation changes since 2013.

As you will note, portfolios have been grossly underweight equity related exposure since April of 2015 creating a positive performance gap between the index and the portfolio. That positive performance gap allows for a more relaxed approached to increasing portfolio allocations when the market re-establishes a positive price trend without sacrificing long-term performance.

The final reduction at the end of January protected portfolios from the decline in February, but has led to a minor performance drag over the last two weeks. But given that risk is still prevalent to the downside, I am willing to give up a potential “bear market rally” for the sake of protecting client capital from loss. 

As I have stated before, when the market re-establishes a positive trend, I will recommend putting preserved capital back to work. However, for such an equity increase to be warranted, the market will need to break the current declining price trend and work off some of the currently extreme overbought conditions. This is shown in the updated chart from last week.

There are quite a few moving pieces here, so let me explain.

• The shaded areas represent 2 and 3-standard deviations of price movement from the 125-day moving average. I am using a longer-term moving average here to represent more extreme price extensions of the index. The last 4-times prices were 3-standard deviations below the moving average, the subsequent rallies were very sharp as short positions were forced to cover. The vertical blue bars show the previous two periods where bulls regained footing and pushed markets from lows towards new highs. The current setup is indeed similar to those previous two attempts.
  
  

  ---

• The top and bottom of the chart show the overbought/sold conditions of the market. The vertical dashed lines show that oversold conditions lead to fairly sharp rallies. The recent rally has responded as expected from recent oversold conditions. With the oversold condition now exhausted, the potential for further upside has been greatly reduced.
  
  

  ---

• With the 125-day moving average trading below the 150-dma, and with both averages declining rather than advancing, the easiest path for prices continues to be lower as downward resistance continues to be built. The arching dashed red line shows the change of overall advancing to now declining price trends. 

The last sentence above is the most important. The signal to increase equity related exposure in portfolios will require a breakout above the currently negative price trend. Until that happens, we remain confined in a “bear” market.

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TIME TO BUY OIL/ENERGY?

The short answer is “NO.”

Let me explain.

First, the rally in “oil prices” is a short-covering/extreme oversold move. While it “seems” like it has been a massive surge in the short term, as shown in the chart below, it barely registers on a longer-term basis. It is always important to keep some perspective.

The chart notes the dates of some of the calls I have been making in this missive since April 2014 when I recommended getting out of oil/energy entirely.

Notice that prior to 2014, the correlation between oil and energy prices was extremely correlated. The deviation I noted in 2014 is now in the process of being corrected, but is not complete as of yet. 

The decline in oil is not complete as of yet as there has been little progress in reverting the supply/demand imbalance. This will take several years to rectify and oil/energy prices will eventually settle into a trading range at these lower levels.

Again, for the sake of perspective, here is what happened to oil prices the last time supply and demand were this imbalanced.

As UBS recently explained:

“Yesterday oil ended in the green despite a very large reported crude inventory build, a reflection of how biased to the downside sentiment and positioning already is. Today, crude started in the red and has been mixed from there but moving higher. And both days, the stocks have led with energy the best performing sub-sector in the S&P.

 

Now, there is no doubt that the performance recently is TOTALLY short-squeeze led. Though it also shows how negative sentiment and positioning is.

WHAT HAS HELPED FUEL THIS SHORT SQUEEZE?

• Positioning and sentiment very biased to the short side/ underweight. And as we move up, the move is also exacerbated by short gamma positions that have to cover at higher levels.
• Despite high oil inventories (and still building), most upstream producers (from Exxon on down) have guided to lower than expected production as a result of lower CapEx.
• Ongoing hopes of a potential agreement between OPEC and non-OPEC members (seems unlikely but now a meeting set for March 20th is reviving some market hopes).
• Credit players covering equity shorts — evident today that “good credit names” are under-performing and “bad credit names” outperforming.“

As shown in the chart below, the number of outstanding contracts on oil is still well above the long-term mean suggesting that more unwinding needs to occur before a longer-term bottom in oil prices is made.

With energy-related stock prices once again at extremes, the next most probable move will be to the downside. This is particularly the case given the recent builds in inventories and a likely disappointment from OPEC/Saudi Arabia on March 20th.

Furthermore, the damage to energy company earnings will be accelerated as the last of hedges begin to roll off over the next couple of months. This realization will push energy stock prices lower as companies are re-evaluated for much lower profit margins and rising bankruptcy risk.

More layoffs are expected. As this occurs the negative impact to the Houston real estate market accelerate as homes fail to sell, apartment inventories rise and commercial buildings remain empty. But such will not be just a localized event but as further reductions in CapEx occur the ripple effect to the rest of the economy will grow. 

Note: If you don’t think housing is about to become a problem, again, this piece by Aaron Layman should give you a wake-up call as interest only mortgages are back. 

As Art Berman correctly stated in a recent interview:

“People think that the economy runs on money, but it runs on energy.” 

He also details in the interview how the current oil price collapse represents devaluation from over-investment in unconventional oil – and most commodities – because of cheap capital, and is simply a classic bubble.

“Continued oil prices of $30 per barrel or less are the only reasonable path to higher growth and a balanced oil market. I think we’re gonna get to $16.50/bbl. Normal is over, and there is no new normal yet.”

It is well worth listening to if you think we have reached a bottom in oil/energy prices.

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LOOKS LIKE A COUNTER-TREND RALLY

Eric Bush at Gavekal Research confirmed much of my own analysis on Friday suggesting that the current rally still has all of the earmarks of a bearish counter trend rally. To wit:

“The stocks with the lowest correlation to the dollar (and highest correlation to the yen and euro) have been the best performers over the past month. Today, we have come across another group of stocks that have been on a nice run that we think syncs up well with our analysis from yesterday and adds an additional signal that we are most likely in the midst of a counter-trend rally.

 

Late cyclical stocks tend to have a negative correlation to a stronger dollar. Consequently, given what we saw yesterday in our factor analysis we are not surprised that the two best performing industry groups over the past month in the developed world have been energy (12.1%) and materials (8%). These two industries have also been the worst performing (energy is down 27.8%) and the fourth worst performing (materials is down 14.1%) industry groups over the past year. Whenever the worst performing stocks start to outperform in the short-term, it starts to smell like a short covering rally. So it make senses that the most shorted stocks have also strongly outperformed the market over the past 4-6 weeks. In the first chart, we show a price series of the 50 most shorted stocks in the S&P 500. These stocks have had a nice V-shaped bounce and are at the highest level they have been at since early December. In the second chart, we show the performance of these 50 stocks compared to the S&P 500. Since January 20th, the most shorted stocks are over 15% higher while the S&P 500 has risen by a little less than 8%.”

“Given that we still haven’t seen a big enough expansion in 20-day new highs and that the best performing stocks over the past month, or so, have been those that have been beaten down the most over the previous year (and have had the most short interest), we believe we are in the midst of a counter-trend rally.

 

At this moment, the probability of more downside in the near term is probably greater than the probability that we have entered a new bullish phase.”

Eric is absolutely correct in his assessment. It is completely understandable that after sectors like energy, materials and industrials have had big declines that trying to bet on a bottom is enticing. However, that is the equivalent to “gambling without looking at your cards.” 

As I stated, since we have been underweight equity risk since last year, there is no need to try and “guess” if the markets have finally bottomed. We only need to wait for the markets to “show” us they have indeed fundamentally and technically turned the corner. At that point, regardless of what the “price” of the market is, the reward to risk ratio for increasing equity exposure in portfolios will be tilted heavily in our favor. Isn’t that what investing is really all about after all?

As Dick Russel once quipped:

“It’s better to be out of a bull market, than fully invested in a bear market.”

I will readily admit that the recent rally over the last couple of weeks has certainly had me second guessing myself. I am human after all and am subject to the evils of emotional bias just as anyone is.

It is in times like these that I must force myself to re-focus on my discipline and strategy to manage portfolio risk effectively. But this does not mean that current analysis cannot be wrong. The financial markets are dynamic and evolving organisms. Events occur that impact markets in an unexpected manner. Therefore, analysis must also be dynamic and evolving in order to remain relevant. The shorter the time frame, the greater the impact the change in market dynamics will have on the accuracy of the analysis. This is why I tend to remain focused on weekly, monthly and quarterly data where evolutions in the markets have a much slower pace of impact to the accuracy of the analysis. 

For example, earnings, which are announced quarterly, are one of the most important drivers of future stock market returns. I have addressed recently the ongoing deterioration in earnings and profits currently.

The importance of this cannot be dismissed. Since 1900, there have been 27 instances of EPS declines over a 2-quarter period. Historically speaking, such a rate of decline has coincided with a recession 81% of the time. The remaining 19% of the time, earnings re-accelerated for a short period due to short-term stimulus (either fiscal or monetary) which only temporarily delayed the onset of a recession. 

The chart below shows the long-term history of earnings growth and the cyclical nature of earnings from 6% peak-to-peak growth to 5% trough-to-trough reversions. (I have provided where Goldman Sachs and Raymond James had predicted earnings to grow from 2014-2020 versus where we are currently.

“Missed It By That Much.” – Maxwell Smart, Get Smart

The next chart shows the current deviation in earnings growth from the long-term trend. Note that negative deviations have coincided with major market peaks.

Lastly, the technical chart below shows earnings capped at the “prior peak” of earnings growth as compared to the S&P 500. Future outcomes have not been kind.

The point here is that while markets have bounced as of late, a major underpinning of future stock prices is still negative. Until a change to the positive begins to occur, the probability of lower prices continues to outweigh the possibility of higher ones.

Therefore, we continue to wait.

 

via Zero Hedge http://ift.tt/1U4Hseg Tyler Durden