Don’t Leave Home Without It

Almost 6 months ago to the day I wrote about the US broad market struggling going sideways but when looking under the hood a lot of stocks forming major topping patterns. I provided a couple of examples, one being American Express, AXP. Of the two, it was the one I felt least comfortable throwing out there because of the magnitude of the loss the pattern was projecting. As you can see in my original chart below, the first target (labeled as T1) was some ~25% below and the second (T2) was ~35%. Without the markets crashing and burning there was no way I felt either of those targets were realistic. I went ahead with the post anyway because all I am is the messenger.

Fast forward to today and even though the markets have not yet crashed and burned (a couple of manageable 10-11% corrections … so far) American Express has not only met my first target (T1) but is well on its way to the second (T2). And looking at the magnitude and voracity of the decline it looks like T2 may not be the end of its fall and a retest of the 40 level looks very possible. That would be a 50% haircut from the date of my original warning post if that were to occur. 

Congratulations for those who followed along.  You are up a cool 30% in six months. Not a bad annualized return. The further it falls, the greater the risk of a reversal so while I am not making a recommendation, I would ensure I had my exit plan mapped out.  One element of it should be to consider booking some or all profits at T2 and let the balance, if any, ride with a tight stop seeing if 40 is in the cards.

Beating a Dead Horse

I do keep a regular pulse on the precious metals market and I continue to be amazed at the resiliency of the (remaining) gold bugs in spite of the drubbing they have taken since the 2011 highs. We have seen repeated bottoming attempts only to have the rug pulled out and prices fall further throughout this entire 5 year decline.

Fast forward to July of last year. You can see in the chart below of the small cap miner ETF, GDXJ, price first found a bottom in the $18.20 area, chopped around and created a higher high in October giving the bulls some hope. Notice also, how that same $18.20 provided support during the entire 6 months + consolidation as it retested it many times. Sadly, the bulls hope was squashed in December as the next impulse move higher was lower than the previous, wiping out the hope for a new uptrend. The final nail was put into the coffin on Friday as the $18.20 failed support and prices are following strongly through to the downside today.

Unless there is some catalyst and we reverse back up here in the next few days, I see another plunge in the works. The head and shoulders pattern that was formed projects to a target around 15, some 17%+ lower than where we were on Friday. I don’t know if that will be it, but because of the carnage that has already taken place, I will be looking for the next flush down to be its final and the potential beginning of a reversal. But for now, the charts are telling us the bears are in charge and making money will not be done buying or holding.

What is Up With the Yen?

I got a call from a friend last week. She asked me about the yen and what I thought. I don’t look at currencies too often as they are pretty illiquid and minimally available in the securities market where client brokerage accounts are held. Additionally, no one will become rich investing in currencies in brokerage accounts so I tend to focus investment attention on stocks, bonds, some commodities and hard assets. Trading currencies is best done via FOREX markets because of the leverage they bring.

Being the natural skeptic I am, my immediate thought when she mentioned it was the yen, really? The dollar is so strong (right now) and the yen so weak there is no way! I pulled up a chart and was pleasantly shocked at what I saw because she was right. As you see in the chart below the yen has been basing for more than a year and has formed an inverse head and shoulders reversal pattern. Last week’s close was just above the neckline and what I would consider as a decent entry point upon confirmation. Add to that it has created higher highs and higher lows while price has risen above a flattened 200 day moving average which looks like it is now starting to curl up. These are all positive and things I need to see before I consider investing in something that has been in as severe a decline as the yen has. I do have my biases and would consider this a “trade” and not investment. I say this because fundamentally I don’t see a rising yen lasting as the Japanese government and central bank are doing everything possible to weaken it and until that changes I think it is doomed long term. For clarity, the difference between a trade and an investment is the time frame. A trade will be shorter in time, likely be a year or less probably months (they have even been as short as a few weeks) and an investment, longer. I prefer to avoid “trades” and hold out for “investments” in client accounts whenever possible.

As you know I try to not spend a whole lot of time on why an investment is doing what it is doing but in this case I am going to as there is a valuable lesson to learn and keep in mind. With the fundamental backdrop being so negative for the yen one has to wonder why it would be moving in the opposite direction it should be. Historically the yen is considered a safe haven (much like the dollar) during times of (stock) market stress and it appears that Mrs. Market is once again remembering that correlation

Because the yen and stocks move in opposite directions, I would expect this yen rally to have some legs as I don’t think we are anywhere close to being done with the stock market decline. But once we are, I think this trade will likely have run its course.

Ay Carrumba

In June of last year I wrote about the double top in Mexico’s stock market ETF, EWW and the (blue) bear flag that was forming which I posted in the chart below. You can see at the time, I labeled the breakdown target from the flag with a black horizontal line which came in around the prior 2011 lows at ~$45. This projected to a 20-25% loss depending upon where you measured the starting point from (the top or bottom of the flag)

Fast forward to today with an updated chart below. You can see we hit the target not once but twice and sit just above the line.  This confirms how important this price as support as it has now bounced off 4 times over the past 4 years.

For those that followed along, congrats but it’s time to lock in the 20+% profit and move on. But is it? You see, when prices are strongly trending (in either direction) many times once one pattern has completed another one forms and EWW is no different. In this case we have now formed a very large, bearish complex head and shoulders topping (in red) pattern which brings with it a much larger potential for profit if it breaks down and you are short. A break and confirmed move below the neckline could be the beginning of the start of its next leg down. While it is hard to write this because it seem so implausible,  the pattern target projects down at around $20, some 43% lower than where we sit today and back right at the 2009 lows. If this works out all I can say is Ay Carrumba!

Bonds ... Where to From Here?

The consensus view is the FED will continue on their path to raise interest rates this year thereby creating a less than desirable environment for bondholders.  We know they only control rates on the short end of the curve so while it is a logical conclusion, it is not a slam dunk long term bond rates will rise in tandem if they continue to increase short term rates. This combined with the fact we have been told any future action will be “data dependent” investors must keep an open mind to the possibility of the long bonds rising in spite of the known “given” fundamentals.

Looking at the weekly chart of the 20 year US Treasury bond below you can see we have formed a symmetrical triangle with price coiling tightly, building energy as it approaches its apex. The $64k question is an investor wants to know the answer to is which way? Triangles are notoriously fickle and provide me little confidence on which direction price will eventually go once it breaks out other than you give a slight edge to the direction of the prior trend (which in this case is up). Either way it breaks, the projected target from the triangle is a move more than 10% which is pretty healthy considering this is a bond and not a stock.

My $02 (which should not be taken as investment advice) is I am a contrarian here. I think the weakness in stocks, the slowdown in recently released leading economic indicators and ongoing foreign currency devaluations will be ample fundamental reasoning to offset any FED action. I think we see long bond prices higher months from now.  But if I am wrong and the FED wins you can bet my investment dollar will be on the direction of the confirmed break out of this triangle not on any fundamental reasoning. When it comes to money it’s ok to be wrong. What isn’t, is to stay that way.