Thursday, January 8, 2015

What I've been watching

I haven't been posting news this week, mostly because I've been disgusted with it.

Michael Shaoul noted that it's allocation season, and thus stocks have been selling off because hedgies are indiscriminately dumping last year's picks for this year's.

Brett Steenbarger followed up on this by noting that while the past week saw a lot of institutional selling, it's been mostly in institutional-held names. Now, he has a proprietary set of 100 mostly-insto-held stocks that he follows so he can see when they're being hit by heavy downtick selling. (He won't name the stocks, but I'm betting Norfolk Southern and CN are two of them - as well as probably any equity that correlates highly with HYG.) This week Steenbarger noted that while there was heavy insto selling, it wasn't being met by any broader selling, so that backs up Shaoul's thesis.

With all this in mind, the lamestream media has still blamed the recent downmoves on childish shit like Greece and rate hikes and the oil collapse.

Which means they have no damn clue and are just pulling explanations out of their asses.

So instead, I've assumed Shaoul and Steenbarger are right (Shaoul's identified insto allocation downmoves before), and watched stocks like NSC for clues as to when the selling stops. With that, I've assumed that this recent US market downmove wasn't going to turn into a compound waterfall: there's no reason for stocks to recover 2% today, for example, only to resume a downdraft, if insto season ends soon.

So yesterday, watching stocks, I was literally falling asleep from the lack of US equity excitement. The S&P didn't print a lower low, but nor did it print a negating high. Let me print a picture:

click to embiggen

But lack of excitement is also a possible sign that the insto selling was done, yet the broader market was waiting to make sure the coast is clear.

Then there's this view:

I didn't think the S&P would print an October-style crash low, because that was mostly driven by irrational fear of an Ebola epidemic in the USA. (Remember Sprott?)

With a 10% drop out of the picture, all I should expect is a ~5% drop. But should I wait a while to see if that chart punches through the lower Bollinger band again, like in mid-December?

I wasn't sure, but according to $VIX it didn't seem as likely:

Its failure to drop below 14 before popping again suggested that maybe the December selling and this week's selling were part of one and the same market action, but with a 2-week holiday in the middle.

So, with that in mind, yesterday I moved my money over to, which is a double-long S&P 500 ETF that tracks double the underlying very well (Horizons 2x long ETFs are great that way).

I also took a bit of profits in gold miners to move some money into, a 2x long Nasdaq ETF.

The idea is, I like being long even in a downturn, because you never want to miss that 3% pop day in a bull market; but when the odds are in favour, I add leverage to make money on the retrace up from a low.

We'll see how this works out. From an economics perspective, you want to be long S&P right now because the low oil prices are going to provide a boost in the US. Every $10 drop in oil boosts their GDP by 0.2%, and I'm expecting oil to keep dropping to $30, not pop back to $70. The speculative premium still hasn't been wrung out: and as we goldbugs know from gold's crash, the price can fall one hell of a lot farther than is predicted by airy-fairy ivory-tower theories of supply and demand.

This'll boost US earnings, and thus even without any P/E expansion the US market can still go up this year (though maybe there's a long period of nasty horizontal churn coming as we get closer to the first US rate hike).

So there's no reason to be short US or neutral US right now.

So that's what I've been watching.

Meanwhile, GLD:UDN was >2SD up, and gold miners were >2SD up:

I don't have enough faith in the miners to expect them to continue >2SD for any length of time, even given the massive selloff that began in the fall.

So I'd not be surprised by at least a horizontal consolidation, if not a drop back down to the EMA(9): after all, this is the highest they've been over their EMA(9) since god knows when, and obviously gold sucks, right?

Then again, gold's just done some interesting things in other currencies. More later.

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