HK Property Bubble? US Stock Market?

Housing bubble

BarroMetrics Views: HK Property Bubble? US Stock Market?

I’m starting to see signs of the late stages of a HK housing bubble: it’s a sign when the man in the street says: ‘Damn the prices! They’ll never come down’.

On Saturday (June 3), the SCMP reported that sales of flats at Ocean Pride were fetching record prices. HK authorities were concerned enough to sound a warning that a property bubble may burst (Norman Lam, CEO HK Monetary Authority). The public’s response?

“Home prices have always been high,” said Alice Shun, one of the hundreds of buyers in the queue for Ocean Pride. “I don’t think it can really ever go down from here”. (emphasis mine)

Another sign is when pundits join the cry.

In the same SCMP edition, Jan Ver Kamp, a popular columnist concluded:

“Mortgage interest rate is the biggest single affordability factor in an affordability ratio, and it has now fallen to levels never believed possible in 1981 or 1997.” (The prior two property slumps).

After tracing the reason for the downward spiral in interest rates, he goes on to say: “And now the people responsible for this folly have to admit they don’t know how to undo it and that their political masters do not really want them to do so.”.

In short, this time it’s different ….. until it’s not.

I’m seeing the same ‘must buy’ sentiment in the US stock market but not quite to the same extent. Last week we saw the stock market move up on poorer than expected Non-Farm payrolls. We’re again starting to see the stock market’s desire to move up irrespective of fundamentals.

Figure 1 shows the last three 18-day impulse swings compared to the current one. Note we are beginning to see a decline in the average true range and average volume. True, it’s early days. But, if I see:

  • the average range drop below 13 points and
  • the average volume drop 300,000

as the market moves into my time and price targets: July – August 2017 and 2560 to 2640  I’ll have the evidence I need to suggest a top is at hand. In the meantime, the bull is alive.

FIGURE 1 S&P 18-day Swing

(chart through the courtesy of Optuma)

Breakout? Buy?

BarroMetrics Views: Breakout?

Today, the S&P appears to have formed a valid breakout (Figure 1):

  • The range is normal for the current conditions.
  • The estimated volume also appears normal. I stress estimated because my data sources’ final volume will not be available until 9:00 PM EST. Sometimes there is a discernible difference between the preliminary and the final volume.

Let’s assume the breakout is genuine, what now?

I use three filters to confirm a breakout:

  1. Time: Whole Point Count (borrowed from Joseph Hart’s Trend Dynamics)
  2. Price: The Maximum Extension. In this case bullish acceptance above 2418 (we have that).
  3. Momentum (what I call the LCC): three consecutive days of new highs (excluding inside days). In this context, we need to see another day that forms a higher high and higher low.

I don’t normally buy breakouts. I prefer to wait for confirmation of the breakout and enter on a retest – provided I see what I call an FTP form just before, or just after, the breakout.

An FTP is a congestion pattern seen on a 1-period swing on the daily chart or a 5-period swing on the 240-min (for the S&P).

Figure 2 shows the 240-min swing. Clearly, we have one.  The problem is part of the swing pattern was formed on Memorial Day. The support and resistance formed by patterns that occurred on public holidays tend to be less reliable.

Early days yet, let’s see what develops between now and July 7 (Non-Farm Payrolls).

One final point, if valid retest does occur, my price and time targets will be: July 15 to August 11 around the 2560 to 2640 zone.

FIGURE 1 Daily S&P 18-day Swing

FIGURE 2 290-min 5-period Swing

Is China Turning Japanese?

BarroMetrics Views: Is China Turning Japanese?

That’s today’s FT ‘Big Read’ on page 7. I’ll let you read the article for yourselves. One thing is clear: the advantage of being 71 with full mental faculties is you see how true is the statement – the more things change, the more they remain the same.

I began taking an interest in politics when I was 14 (1961). You can thank JFK for that. At that time, the Soviet Union was all the rage. The talk was how it would overhaul the US and how (and why) the one-party state would prove superior to a republic protection individual rights.

Then in the mid-1980s’, the talk was all about Japan – how its system was overhauling free enterprise.

Both the Soviet Union and Japan failed at the same time (`1991). The bottom line is the effect of economic laws can be postponed but not avoided.

Today, it’s the turn of China, and sadly, the USA.

The FT article about China is a classic example of why this time it will be different – it always is until it isn’t.  At least FT, unlike the 1960s and 1980’s gives some reasons why this time it may not be.

At the other end of the political spectrum is the USA: same argument, this time we have the tools to make it different. We’ll see. The FED now needs to unwind its accumulated balance sheet without spooking the markets and without creating a major recession (unwinding may lead to high inflation which leads to unexpectedly high interest rates which lead to a recession). If the recession comes during the Trump presidency, no doubt he’ll be blamed for a recession/depression that was in the making before he took office.

That’s why I have shortened my trading timeframe. I don’t want to be caught in a 1987 type crash.

 

S&P On Track 2560-2640

BarroMetrics Views: S&P On Track 2560-2640

The Upthrust Sell signal triggered on May 17 looks like being negated: I need only see a bullish-conviction close above 2418 to say that has happened.  That would confirm that the strategy suggested in “Trump & the S&P…” was correct.

Assuming we do see a bullish-conviction close above 2418, then there is a strong probability we’ll be seeing 2560 to 2640. If we do see those prices around end July, early Aug, then we may have a possibility of a top.

In the meantime, I’ll take the view of ‘long or out’.

FIGURE 1 S&P 18-day Swing

Need for Public Participation

BarroMetrics Views: Need for Public Participation

Top S&P?

I had considered the sideways move in the S&P, commencing Jan 2015, to be a distribution pattern. The only fly in the ointment in this view was the lack of public participation. One of the characteristics of long-term tops is a massive investment by the public.

Well, with Trump’s election breakout on Dec 2, 2016, I needn’t worry about that aspect. Public participation has come back (see Mom and Pop Investors Are Behind This Historic Market Rally, 2017-02-28).

So, are we on track for a high in 2017?

So far – but I’d like to see the S&P get a move on to reach my price targets, optimally 2640 to 2560 (basis cash); my time targets are 2017-07-15 to 2017-08-11. Beyond that, I have another set of dates 2017-11 to 2017-12.

Apart from the S&P price and time objectives, there’s one more event I’d like to see take place: I’d like to see the St Louis Fed Reserve, Asset Monetary Base (AMB), start a sustained down move by the end of this month. The AMB move South is not necessary but would be an optimal factor.  (FIGURE 1)

(NOTE: I’ll be in Singapore this week so that the blog’s publication schedule will be interrupted).

FIGURE 1 Asset Monetary Base

 

Trump & S&P: Uptrend Ending?

BarroMetrics Views: Trump & S&P: Uptrend Ending?

On November 18, Trump’s election to the Presidency started a rally in the US stock market. True, the weekly volume and range have dropped in this upmove. Before QE, I’d have said that the drop characterised a top in the making. But with QE, we have seen a persistent uptrend unaccompanied by robust volume and range. Effectively, QE placed a floor below the markets.

Figure 1 is a weekly chart of an S&P (CFD) showing:

The difference between the trend up prior to the congestion that began on 5/22/2017 and the start of the Trump move on 11/11/2016. You’ll note that the mean range dropped from 43 to 36 and volume declined from 84M to 62M.

Figure 2 is the daily chart showing an 18-day Upthrust Change in Trend Pattern. Even if the pattern fails, we should see prices test the Primary Buy Zone at 2331 to 2320 (Maximum Extension comes in at 2304).

Normally, I’d take the Upthrust signal. But, given the situation with QE, I’ll wait until I see a confirmed change in the 18-d trend before looking to adopt a shorting strategy. That means I want to see:

  1. A momentum signal starting with a breach of 2320 (what I call an LCC – three consecutive bars making lower lows [inside days are ignored for the 3-day count]); and
  2. Acceptance below the Maximum Extension at 2304 (calls for a bar opening above the top third of the day’s range and closing below the bottom third where the close is below 2304. Also, at least half of the bear-bar’s range needs to be below 2304) and
  3. Most important, seeing nine consecutive bars whose ranges are below 2320 (what I call the WPC).

FIGURE 1 Weekly S&P

FIGURE 2 Daily S&P

 

 

Impact of French Elections Results on EC

BarroMetrics Views: Impact of French Election Results on EC

The French elections are over. With Macron in place, can we say that Frexit is dead and buried? After all, the pundits say that one of the reasons he won was because the French want to stay in the EC.

It seems to me, the threat is there – just dormant for the moment – ready to raise its head unless Macron delivers on his promises. But, that is easier said than done.

Let’s have a look at the challenges facing him.

Firstly, his party, En Marche, needs to win enough seats in the elections on June 11 and 18 to pass his program. The first poll by Opinionway suggests En Marche will not win an outright majority and will need a coalition to govern – casting doubt on whether Macron can deliver.

Opinionway projects:

  • 240-286 for En Marche
  • 200-210 for centre-right Republicans and their allies UDI
  • 15-25 for Le Pen’s NF and
  • 28-43 Socialist Party (down from the current 280).

Secondly, he has promised to improve the French economy. Two of the fundamental planks are:

  1. Reducing Government expenditure from the current 56% of GDP. Here he’ll face resistance from the far left and far right, the Unions and some politicians. To date, all attempts to slash spending have been defeated.
  2. Persuading Merkel that his demand for less austerity is a request by a fiscally responsible state and not one from a spendthrift nation. To do that, he needs to reduce Government spending.

The internal challenges are linked, and unless he can overcome them, the door is there for a Frexit party to walk in 2022.

In the meantime, the EC has to face the German elections on September 24 and the Italian elections, possible in 2018.

For traders, those dates are a long way away. So is the EUR likely to move North or South against the major currencies? Yesterday’s blog, “Impact of French Election Results on ECImpact of French Election Results on EUR” set the short-term picture. Let’s see which way that goes before we guess the longer-term outlook.

Impact of French Election Results on EUR

BarroMetrics Views: Impact of French Election Results on EUR

I was wrong: I thought Macron’s win would give the EUR one more up day. Instead, we saw the currency head South from the time my platform opened for business.

So what now?

Turning first to the technical aspects. I’ll use the EURJPY as a proxy for the EUR complex.

Figure 1 shows the 12M Swing. I see this as a Market Profile pattern seeking to establish a sideways congestion between ‘A’ and ‘B’. The current price action bounded by ‘a’ and ‘b’ is seeking to form the congestion’s Value Area by establishing a swing low at ‘b’. When complete, we’ll see a move to ‘A’. But, an acceptance below ‘b’, suggests at least a retest of ‘B’ and perhaps its breach.

Figure 2 shows the 18-day price action. You’ll also observe the gap created following the first round French elections; you also see that the Primary Sell Zone of ‘c’/’d’ held yesterday’s move south.

A bearish conviction close below 122.93 will suggest at least a test of the 114.84 to 116.00 Primary Buy Zone and probably its breach. A bullish conviction close above yesterday’s high (124.48) suggests we will see a test of ‘A’ in Figure 1.

Tomorrow, I’ll consider the challenges facing Macron since his success or failure in meeting them will impact the survival of the EC.

FIGURE 1 12M EURJPY

FIGURE 2 18d EURJPY

French Voting Turnout Favours….?

BarroMetrics Views: French Voting Turnout Favours….?

Tracking the numbers voting I read that the turnout so far is said to be the same as the first round. If so, the turnout favours Macron.

So what can expect from a Macron win?

May 8: we should see a strong rally in the European Stock indices, especially the CAC and Dax.  Will the rally continue into next week? I am not too sure – indeed, I’d say it’s only a 50-50 bet that it will. Here’s problem as I see it.

Macron (or Le Penn) does not have enough seats in the legislature to carry out his policies. Yet, the markets have been behaving as if a Macron victory will guarantee reform. (See Figure 1 DAX Daily). It seems to me we’ll probably see selling pressure coming into the European indices after Monday. If the selling does come in, the probability is we’ll see a retest of 12000.

What about the EUR pairs? Similar story: strong rally Monday, followed by a break possibility.

So, the safe trade is long EUR pairs and European Indices Monday. Then monitor to see if a sell signal transpires.

Figure 1 DAX Daily

Backfire Effect

BarroMetrics Views: Backfire Effect

I received a couple of emails and one comment against my assertion that Macron would probably win the French Elections. Before I comment, I thought a brief excursion into the ‘Backfire Effect’ would be in order.

“The ‘backfire effect’ is a name given for the finding that, given evidence against their beliefs, people can reject the evidence and believe even more strongly” (Rational Wiki Backfire Effect).

Can Le Pen win? Of course. But, as a trader, I would not be taking a position on her success. Here’s why:

  1. She failed to win the first round, even though she had the best conditions for her campaign, viz, the terrorist attack just before the voting commenced.
  2. French polls, unlike the US and UK, have been remarkably accurate.
  3. Based on their findings, Le Pen can only win if there is a 50% abstention rate. While possible, the rate is unlikely. The polls have the rate at 25%, in which case, Macron will win.

So how am I going to the elections?

I’ll be focusing the EURJPY – win or lose for Macron, this pair should offer opportunities. But, I’ll need to see the result and wait till around 9:00 am HK before I am willing to devise a strategy.