FOMC Wednesday Sept 17

BarroMetrics Views: FOMC Wednesday Sept 17

It’s likely that Wednesday’s FOMC (2:00 am EST) and press conference (2:30 EST) will move the stock, precious metals and FX markets.

The key focus will be on whether the words ‘for some considerable time’ (rates to remain to low for some considerable time) will be omitted, altered or left untouched.

Leaving the words in will suggest that there will be little probability of an accelerated rate increase; omission or alteration suggests an earlier rate rise. Time to see if the FX traders or Stock players will be correct.

Today the FX markets were relatively quiet. We either saw inside days or a small reversal of the near term direction e.g.

  • USDJPY, EURUSD, USDCAD inside days, 
  • GBPUSD GBP continued its retreat from the recent bear market rally, and 
  • the USDCHF USD had an outside day with an up close; range was normal. This pair has been stuck in a 5-day trading range.

I expect to see another quiet day today ahead of tomorrow’s FOMC.  Will the words be left in? If not for Yellen, I say no. But, given her views and the fact she is Fed chief, I’d say there is a 50-50 bet that they will be. We’ll see 2:00 PM EST Sept 17.

A Thin Line

BarroMetrics Views:  A Thin Line

The thin line between trading success and failure was recently driven home.

End June this year, we completed the first Ultimate course. I view Ultimate as my best course to date. I had a new format (Flip the Classroom) which I believed would make a difference to the learning. So what happened?

Fourteen weeks of intense study provided the attendees with a solid foundation for understanding the nature of markets and themselves; more important it taught them to apply that knowledge to attain their trading goals.  For most, at the end of the course had a trading plan, and templates for the application of their money management rules and psych process.  (For others, shortly after the end). From the perspective of achieving my goals, all looked rosy for their future.

Then……..

The other month or so, I spoke with a number of them – I wanted a handle on how the group was doing:

  • Some were doing great! 
  • Others were experiencing a drawdown but were psychologically in good space (i.e. they accepted that drawdowns were inevitable in this game and their positive expectancy was intact).
  • While still others were struggling and wondering where the success they expected had gone. They had worked hard but had little to show for their work.

Think about this: same course, same teacher, every graduate had worked hard to learn to the theory, incorporate theory into a set of trading rules, and then worked hard to consistently implement their rules. And yet, the results varied widely – especially among those who had done well and those who had little to show for their efforts.

I looked to find a solution.

  • Different instruments? That was my first thought. True most were trading FX. But two were trading stock indices, and their results were at either end of the spectrum.
  • Timeframe? Nope, most were end of day traders.
  • Consistency of execution? There were some differences but not enough to account for the results.

In fact in some cases, exactly the same timeframe, instrument, the same pattern, and execution brought about very different results of success and failure.

I found the discrepancy fascinating. Eventually I found two reasons that seem to explain most of the cases…..more later this week.

By the way, you may like to comment on this question: what is the single most important difference that has distinguished between your successes and failures?

A Tale of Two QEs II

BarroMetrics Views: A Tale of Two QEs II

The price action in the S&P’s for Sept 10 and 11 provides examples of what I meant in yesterday’s piece. For each day we see a lower open followed by a push up. This I believe will continue until a Black Swan event occurs shattering the belief that the FED can forever keep US stocks up through QE. (Figures 1 & 2)

What might that event be?

Certainly FACTA may fill the role of event catalyst. Here is an excellent piece by Peter Schiff. Took long to quote so I am attaching as a PDF

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FIGURE 1 S&P 30-min

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FIGURE 2 S&P Daily

facta-neighborhood-bully.pdf

A Tale of Two QEs

BarroMetrics Views:  A Tale of Two QEs

The USD and stock indices have two very different tales about the end of QE.

Figure 1 shows (weekly chart) the majors with the AUD and CAD. Except for the CAD, we see the USD in full flight north. For USD traders, it appears that it is not a question of ‘if’ but rather a question of ‘when’ (and a reasonably close to a today ‘when’).

Figure 2 shows the S&P. We see an upside breakout above 1992 that has been followed by reduced range and volume. Now normally, this would be a warning of a possible sell-off. But in this age of QE, we see that each time that S&P has attempted to sell off, buyers have come in (arrows).

Figure 3 is the Russell 2000. The divergence between this index and the S&P is normally bearish. Moreover, Russel is showing the same lack of follow-through after its recent rally attempt.

So whose going to be right?

Looking at the stocks first: I am holding to the view that stock indice traders believe that whatever the FED may say, it will come to the rescue of a drop in the stock market. We need to see some black swan event to knock this belief on the head before we see any meaningful decline. But, that is not to say, there are no storm clouds gathering:

  • an indicator I am testing uses Jungian Archetypes as a sentiment indicator. Testing is incomplete but so far the indications are that this sentiment indicator is better than the ones I am currently using. Recently the indicator turned from supporting the continuation of the bull run to withdrawing the support.
  • we are see a spate of more QE from the the press (e.g. Why the Federal Reserve Will Launch Another Round of QE). For me, from a sentiment viewpoint, this spate is bearish. 
  • finally US short-term yields have been moving higher (even in the face of the last week’s job number) – after lagging behind Fed expectations. 

For the moment, I’ll run with USD strength and wait for the CAPE system to generate a sell signal before turning bearish.

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FIGURE 1 USD

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FIGURE 2 Weekly S&P

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FIGURE 3 Weekly Russel 2000

S&P 2014-09-08

BarroMetrics Views: S&P 2014-09-08

First off, thanks for the emails. Nice of you to ask. (Some readers had written to ask if all was OK in my world; they had noticed that my blogs had been shorter than normal). All is well – just working on something that is taking much of my time.

Turning to the S&P’s…..

It is at an interesting stage.

  1. Figure 1 shows the  Fred AMB of the Fed Reserve. The deposits have started to fall; if they reach the orange line, a top will be signaled (retrospectively).
  2. Figure 3 shows the weekly chart. We see a two-week breakout on poor volume; and we see that last week, the S&P formed a neutral week. Normally this pattern, new high – neutral bar, augurs a break. But,
  3. Figure 2 (daily chart) shows that the S&P had been unable to sell off  last week, Monday to Thursday; and, on Friday, on the below expectations Non-Farm, the S&P rallied. But, this relief rally (‘oh goodie’ QE to continue rally) was on the lightest volume I have seen for relief rallies. This may mean we are nearing a top.

Needless to say I am awaiting to see what happens. I’ll be using the model I introduced at the CMI event in August to tell me the top is probably in.

(BTW if you are wondering why my weekly is chart 3 rather than Figure 2….For some reason I was unable to upload the weekly as Figure 2…..joys of the internet).

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FIGURE 1  FRED AMB

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FIGURE 3 S&P Weekly

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FIGURE 2 S&P Daily

GDP Calculations

BarroMetrics Views: GDP Calculations

Today the FT trumpeted that the ‘OK economy (gained) statistical boost’.

On closer reading we find that the ‘improvement’ was the result of ‘improved’ revisions. As a result of the revisions, GDP grew an extra 1% per annum from 2010 to 2012; and as a result of the improvements, the recession of 2008 and 2009 was not as great as we had thought. Indeed from 2008 to 2012 the output level increased by 2.6%.

If only trading profits were that easy, with a stroke of a pen I could increase my bottom line!

The problem is, like the US, the real picture is very different. In the UK, family finances were on the slowest on record. Like the US, the middle class is paying for Government policies (see How the Middle  Class Became the Underclass).

When the dam of QE breaks and the results come home to roost, who will the Governments blame? In the meantime, my stock indices trading strategy remains the same: “long or out”.

S&P 2014-09-02

BarroMetrics Views: S&P 2014-09-02

The S&P continues to churn, making new highs on low range and volume. Nevertheless each attempted sell off has been met with buying. In Figure 1, you see two  days where the S&P sold off at the open, only to finish near the highs.

The St Louis Fed AMB is due out this week. I’ll be interested to see what that shows.

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FIGURE 1 S&P Daily

It’s the Unemployment, Stupid

 Barrometrics Views: It’s the Unemployment, Stupid

Yesterday I came across a segment  on Fox News where the anchors were casting doubt on the US Job recovery. If Fox is starting to query the numbers, it’s only a question of time when the main stream programs hop on the band wagon. And, it’s about time.

Figure 1 shows the most current chart from ShadowsStats. We see not only a difference in the levels of unemployment, but since 2012, a difference in the direction – SS has the numbers going sideways to up whereas the official numbers are heading South. (BTW the difference between U3 and U6 lies in the fact that the former does not see long-term unemployed as ‘unemployed!).

So why the difference between SS and the official numbers?

Part of the reason lies in the use of ‘seasonal adjustments’ that are so vague that you just about create any number you want; part of the reason lies in the way part time unemployed are used to bolster the numbers. To see how this is done, read 10 Terrifying Facts About US Jobs in the section, “The Rise of the Part-Time Worker“.

Despite the official numbers, the FED must realise that the job front is the major weakness in the US ‘recovery’. Sooner or later, it will be forced to release the funds locked in at the St Louis Fed to Main Street. The main job creators have been the SMEs. Right now they are unable to expand due to the fact the US banks have stringent bank loan conditions – unusually so.

And that’s because they don’t need to lend. After all they are getting commercial rates at the St Louis FED. Should the FED stop paying commercial rates the the St Louis FED, the banks will be forced to again begin lending to the SMEs.

But, here’s the bind the FEDC is in. Release of the deposits into Main Street will raise inflation fears and pressure to raise rates. In turn, that may be the Black Swan that breaks the belief that the FED will do whatever it takes to keep the stock market afloat.

It will be interesting to see what the FED will do.

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FIGURE 1 ShadowStats Unemployment