Wednesday, January 8, 2014

The Early Decade Analog

RED = end of 1971, all of 1972, beginning of 1973

WHITE = end of 2012, all of 2013, beginning of 2014

S&P 500

Dow Jones Industrial Average (with all of 1973 shown)

Monday, December 2, 2013

VIX and Beta and Confluence

Anyone has been reading my material over the year knows I've had a few post on watching the VIX and its beta. As it should go with little explanation, the beta will always be negative (as VIX rises, typically the S&P 500 falls). 

Now, this chart is going to take some explanation, but first, the chart:

Let me explain (in detail) what this chart represents. First, let's discusses each line.

The RED BARS is the S&P from October 2006 to October 2007 (basically 1 year). The RED BARS stops at where the S&P made it's bull market high. The RED LINE is the VIX beta with an input of 50 days for the same period. Again, this is the average beta for the VIX over a 50 day time period. Both the Left and Right axis ARE NOT the actual readings for the RED BARS or RED LINE.

The BLUE BARS is the S&P from December 2012 to December 2013. The BLUE BARS stop at current days price. The WHITE LINE is the VIX beta with an input of 50 days for the same period. The Left and Right axis ARE THE CORRECT reading for the BLUE BARS and the WHITE LINE.

What we have here is an analog and an ASSUMPTION that Black Friday's (last Friday's) high was the market top of this bull market. Again, let me say repeat: THIS IS AN ASSUMPTION.

There is no change to the scaling of the axis here, specifically the X-axis. What is rather incredible is that the WHITE LINE and RED LINE bottomed at the EXACT same point within the time frames, made similar moves higher, and "chopped" around. 

Is this a call for a market top?  

Don't hold your breath! This is simply an observation.

It is interesting however the confluence we are seeing in the S&P. Take a look at these charts.

A confluence of Fibonacci levels:

Retesting the once Support Uptrend Line, turned Resistance:

Possible Wedge Squeeze, break Lower:

VIX breaking through Resistance:

This all lends itself to the question,"ARE WE CLOSE TO THE TOP?", but then again, that question seems to be getting very old, very quick now doesn't it?

Observe and Report.
Resist Temptation to Act until Confirmation.


Saturday, November 30, 2013

Fashionably Late on Gold and Silver Hate?

It seems fashionable to hate gold, silver, and their miners alike. It never ceases to amaze me when one love any asset at much higher prices only to hate it with a passion when it becomes much cheaper. It's funny because when we buy material objects we tend to always look for "sales" or "clearance deals" but as investors, the higher the price gets (and sometimes regardless of fundamentals or valuations), we tend to have endless love for it. 

Here is a technical look at gold, silver and their miners, but rather than priced in US dollars, they are priced in equity indices, or what most have come to "love" and "cherish".

Gold Futures - S&P Futures Spread (1x1 contract), monthly chart

Gold Futures - S&P Futures Spread (1x1 contract), daily chart

PHLX Gold/SIlver Sector / S&P 500 Ratio

Russell 2000 / PHLX Gold/SIlver Sector Ratio

By no means is this an indication that gold/silver and their miners are done falling and/or equities are done rising, but the quantity of articles and posts now starting to call for further gold selling off and higher equity prices seems... well... a bit late to the game based on these charts.  Miners (especially) are starting to get the "financial stocks of 2009" vibe. With that said, much like financial stocks, not all miners are created equal. Do your homework.


Friday, November 29, 2013

Valuing the Markets Warren Buffett Style

Warren Buffett has said the best market valuation tool is determining the Market Cap to GDP ratio. Some would use GNP instead, but either way they are very similar numbers. This data can be found on the St. Louis Federal Reserves website (what is known as FRED charts). We use the MARKET VALUE OF EQUITIES (excluding financials), also called MVoE, data set and measure it against GROSS DOMESTIC PRODUCT (nominal), known as GDP, to achieve the ratio. The data set goes back to 1951 and is measured on a quarterly basis. 

From 1951 to 1997, the MVoE to GDP ratio never exceeded 1x. It wasn't until the formation of the technology bubble that we began to see the ratio exceed to 1x mark, peaking at 1.54x. It should go without much explanation that the ratio at these levels are unsustainable. How can the market value of equities (in dollar terms) exceed the gross domestic product over a long period of time? 

In fact, the average quarterly ratio since 1951 is 0.68x. The median is 0.65x. The regression trendline is 0.91x. In all cases, these numbers are below the 1x mark. Here is a chart of the data:

If we take a look at GDP year-over-year growth since 1951, we can see a concerning developing trend:

source:, US Bureau of Economic Analysis

Moreover, if we look at the frequency of GDP growth Y-o-Y since 1997, we see the following:

source:, US Bureau of Economic Analysis

1% to 4% is the most frequent GDP growth occurrences Y-o-Y since 1997. If we go back to the data above, if the average market cap-to-GDP ratio is 0.68x since 1951, then we could assume that every year GDP grows by 4%, stocks (in theory) should grow by 68% of that number, or 2.72%. Since 1997, we have had two major market declines, followed by two strong recoveries, especially the cycle we are currently in.

In April 2013, the MVoE to GDP ratio was at 1.09x. Though the present data is not currently out, it is expected that we are roughly at 1.15x. This exceeds the high of 2007. In dollar terms, it is estimated that the MVoE is $2.5 trillion greater than that of GDP. This would mean just to return to a 1x ratio, the market would need to shed roughly 13% to return to "even".

But what happens if GDP continues to grow at 2-3%? We can't expect more plus 20% appreciation in stocks right? History does not favor this however we must consider the environment we are in. Since the 1980s we have had a massive expansion in private sector credit, peaking during the Housing Bubble. Since the bursting of the housing bubble, credit in the private sector hasn't been growing at the same pace. In fact, it's YoY growth is the some of the worst on record (as should be expected). 

Since credit growth is slowing dramatically, what has changed? The Fed's balance sheet. Ever since credit dried up and slowed down, the Fed has been pumping liquidity into the financial markets to help "sustain" the economy.

As the chart above shows, once households began to "deleverage", the Fed's balance sheet moved straight up. We have also seen an expansion on government debt to go along with the Fed's actions.

So back to the point at hand: with an average MVoE to GDP ratio of 0.68x, a median figure of 0.65x, and a regression number of 0.91x, at the present 1.15x and incorporating how and why we have got to such a level, it is clear that the market is overvalued. Much like in 1997 through 2000, the market can stay overvalued for a good period of time and in that case, reach a high ratio of 1.54x before the tech bubble burst.

Low GDP growth Y-o-Y does not lend itself to sustainable high rates of stock appreciation in the long term. As a trader, one can easily take advantage of the massive inflows occurring by "dumb money" recently (BTFD, BTFATH memes). As an investor, we are beyond the point of caution as red flashing lights are going off.

I suspect that we will see a correction of between 20-40%. At what point this "correction" occurs is beyond me. Many analogs I and others have posted would seem to suggest sooner than later, but these markets have taken a new direction on what they are focused on, from fundamentals and valuation to stimulus and/or the promise of. Therefore... keep yourself solvent. 


Sunday, November 24, 2013

Surgical Abstractions

A market, dissected. It's a question of meaning or a lack of but the search for...

The Dow 30, chopped up in 32 years

Dow of Today vs. S&P 500 of 60s/70s

Russell 2000 from 1998 - Present (white) vs. the Dow Jones Utility Index from 1987 - 2007

 ... and for the bit more, obscur...

The Green Line is the Russell 2000 Index

The Green Line is the Russell 2000 Index

The Green Line is the S&P 500

The Green Line is the S&P 500

The Green Line is the S&P 500

The White Line (only) is the S&P 500

The White Line is the Dow Jones Industrial Average

Friday, November 22, 2013

Chart Art - Body Of Work







love / hate relationship

a familiar friend in self

then and now was 84 years ago...




new or used

Thursday, November 21, 2013

Micro Cap Analog says.... "Flash Crash" v2.0 ??

Scanning through charts, I cam across an interesting analog today I thought was worth a post. This is the Russell Micro Cap ETF ($IWC). Micro-caps have been extremely strong (high beta) recently, much like a point before the Flash Crash. These chart patterns look oh-so-familiar.

First, here is $IWC from the market bottom in 2009 to right before the Flash Crash in May 2010 (daily chart):

Now, here is $IWC from the 2009 to Present (weekly chart):

The similarities are quite remarkable. Whether they end in the same fashion will have to wait and see. If so, here is what we might expect. First, how the "Flash Crash" ended:

And second, what we might expect from the analog playing itself out:

This would indicate a price around $47, or a drop of roughly 34%.

Time will tell...