THE TECHNICAL SIDE

 
If you're of a technical bent when it comes to the market, you might find this article of interest.

marketwatch.com/story/technical-analysts-are-spotting-a-bullish-signal-in-the-sp-500-2015-12-18

Technicians pay lots of attention to things like price and volume. They also focus on trends and moving averages and less so on more abstract terms like value. You could say, at least in their view, they try to omit much of the noise like P/E ratios and earnings and sales otherwise known as fundamentals.

Their world in brief consists of charts and moving averages and so on. Over the years there's been many well known technicians, people like Marty Pring, John Murphy, Marty Swartz and a host of  others to. Numerous to list here. Some were well known for their writings, others their trading prowess.

Even with Friday’s selloff, the S&P 500 index is on the verge of passing into territory interpreted by market technicians as a bullish indicator.

As the article notes, there something called the "golden cross." It's an indicator based on  50-day and 200-day moving averages and when to reaches or crosses certain points. The important point to keep in mind here is it's an indicator. Indicators are not infallible, but certainly of interest.

The S&P 500 SPX, -1.78%  is less than a point away from a so-called “golden cross,” when the index’s 50-day moving average crosses above its 200-day moving average. In fact, golden crosses occurred with the Dow Jones Industrial Average DJIA, -2.10%  on Wednesday and the Nasdaq Composite IndexCOMP, -1.59%  on Dec. 8.

Currently, the S&P 500 is down about 20 points, after Thursday’s 31-point selloff. The S&P 500 saw a so-called “death cross,” when the 50-day moving average fell below the 200-DMA, on Aug. 28.

In data compiled by Dow Jones, a golden cross on the S&P 500 has only happened 22 times since 1970, and of those occurrences, the index traded higher 19 times, or 86% of the time, a year later. The last time a so-called golden cross occurred on the S&P 500 was Jan. 31, 2012, according to Dow Jones data.

While historical data is no indicator of future performance, data shows that of the last six times a golden cross occurred on the S&P 500, the index was up 12.4% on average a year later. Going back to 1970, that average drops down slightly to a 11.3% gain one year later.

Shorter term, the tendency of the S&P 500 trading higher falters a bit but is still encouraging.

Using the data going back to 1970, the S&P 500 traded higher 73% of the time three months after the cross with an average gain of 4.8%, and traded higher 59% of the time one month later for an average gain of 1.7%.

MANAGED NUMBERS

For a long time we hinted at what lots in the media seemed not to want to believe: that China's growth figures, to use a kind term, we're being managed.

Back in the double-figure-GDP growth days, there was probably less of it going on though even then one had that apocryphal feeling that comes from listening more to one's intuition than intellect, most likely a characteristic not much appreciated in our numbers-crunched madness today. (See Federal Reserve Bank).

Now, however, managing them seems much more necessary to damp down all kinds of unrest, political, social and otherwise. Another tip off in our view is the government announced shift from growth to domestic consumption. That China plays a hard game of beggar thy neighbor is undeniable to all but the entrenched.

Another perhaps kinder term, one frequently heard on the Street, is massaged. Either way, they're hardly to be trusted. And neither for that matter are those of any government. Part of  the difficulty is just the magnitude of the job. Another part is just plain old obfuscation. People in power usually like to stay in power. Some will try to twist that into an egregious violation of the PC code.

It isn't. Ask yourself this: Why would Wall Street, tobacco, big pharma, banks, to name but a few, be the only atolls of pollution in an otherwise ocean of purity? The answer is simple: that ocean of purity doesn't exist, private or public. In today's issue of Barron's, barrons.com/emergingmarketsdaily/2015/12/18/7-emerging-markets-to-watch-in-2016-bric-matters, they name seven emerging markets to watch in 2016. Here's what they write about China.

China: GDP figures are increasingly seen as “managed” by the government rather than an accurate reflection of the economy. Should growth slow faster than expected, expect more stimulus: we see room to cut local interest rates and/or increase government spending further. One possible stimulus we hope not to see is a sudden, material devaluation of the Chinese renminbi (five percent or greater as a one-off step). During the prior four years, while the renminbi (RMB) has weakened about 1.1% against the dollar, it has climbed about 20% against a broad basket of key trading partners … [The iShares China Large-Cap ETF (FXI) is down 13% this year.]

We're not basing our conclusions on one example, to be sure. As we noted above, it's been in the discussion for some time. Suggested in this evaluation by Barron's is a play, one way or anther.

OPPORTUNITY HERE?

This article from Barron's falls into the silver-lining category concerning the recent turmoil in high-yield bonds. Interest rates may have just gone up, but capturing yield is still an important part of the investing scenario.

High-yield fears grow as default wave spreads,” screamed the Financial Times. 

“Typically you get this kind of stuff when you’re close to the bottom,” he observed about the high-profile events hitting the market, notably the shutting of the Third Avenue Focused Credit Fund. That spooked investors even though that fund delved into much more speculative credit than the typical junk fund.

The bright side of the junk storm is that it has restored some measure of value to the market. Kaufman says he’s buying intermediate-term bonds of a company he likes, which originally were issued with yields in the 5%, but now yield in the 8% range as a result of a price drop of about 15%. (He’s mum on the name but says it’s in the tech sector, and nowhere near the oil patch.)

Spreads to be sure are important.

Spreads — the extra yield paid on lower-grade securities to compensate for their higher risk — have increased markedly. The Bank of America Merrill Lynch high-yield index is 709 basis points above comparable Treasuries, up sharply from this year’s tightest level of 438 basis points in early March and 335 basis points at the cyclical trough in June 2014. (A basis point is 1/100 percentage point.)

That’s not extreme undervaluation, given the expected rise in defaults, he says. Starting with a yield of 8.14%, and deducting forecast credit losses of 4.71% (defaults after taking into account recoveries of principal), leaving an expected return of 3.43% over the next five years. To be sure, those defaults are likely to be concentrated in those trouble spots of energy and other commodities.Deft managers have been avoiding those sectors. 

In fact, the trouble spots actually could be still be situated in officially investment-grade companies, according to Cliff Noreen, president of Babson Capital Management, with $223 billion under management, including $40 billion in global high yield. Those sore spots include Glencore and Freeport-McMoRan ( FCX ), which already are trading as junk even though the ratings agencies haven’t confirmed that. 

At a 700-basis-point spread, Noreen thinks investors are being compensated for the risks, which he says are more technical than fundamental. That’s especially the case for high-yield closed-end funds, which he says afford investors the opportunity to buy into an out-of-favor asset class at 10%-20% below their market values. To be sure, part of those discounts reflect the market’s haircut because of the funds’ leverage, which could hurt as the Fed raises short-term rates.

barrons.com/articles/oversold-junk-bonds-pay-10-and-offer-growth 

INCOME JUST GOT HARDER TO FIND

On the subject of inflow and outflow, especially given the junk bond turmoil, here are some interesting numbers. Not only do they tell what investors are doing, but they give some inkling of where they're going.

Cash still pays next to nothing. Sure it's nice to have if you think a selloff-rebound in equities is imminent. But income is still hard to find.

Elsewhere emerging-market debt funds saw outflows of $2.2 billion, the biggest in 15 weeks, and have now suffered outflows in 20 of 21 weeks. And investors withdrew $3.3 billion from investment-grade bond funds, the second-biggest weekly exit in two years.

As for Treasury and government funds, the outflow amounted to $300 million, but money has exited nine of the past 10 weeks.

On the equity side, U.S. stock funds suffered outflows of $4.2 billion, while inflows to Europe slowed to $600 million. Another $1.3 billion came out of emerging markets, the seventh-straight week of outflows. More:

One wants to tread lightly here, but that doesn't mean there are not opportunities. Do yhour homework.


marketwatch.com/story/bond-investors-abandoned-ship-this-past-week-2015-12-18 

OVERNIGHT

The post-FOMC rally didn't last long as stocks as ended a three-day rally, oil continued its drubbing, dropping to it lowest level in seven years, and the carryover wasn't wasted overnight on Asian markets.

Reuters reported Taiwan's central bank cut rates for the second time this year while China's yuan has weakened against the dollar for 10 straight sessions through Thursday, the longest weakening streak on record, after the central bank guided the Chinese currency lower.


From the WSJ : Most Asian markets fell Friday after a strong week, as oil fell to a fresh low since the financial crisis and the rally following the Federal Reserve’s interest-rate rise dissipates. Japan’s Nikkei Stock Average fell 0.6%, Australia’s S&P/ASX 200 slipped 0.3% and South Korea’s Kospi fell 0.5%.

Hong Kong’s Hang Seng Index was down 0.5% while the Shanghai Composite Index rose 0.1%. 

PENT-UP RISKS AND WHAT'S CHEAP

Now that the first interest rate hike from the Fed is being digested, much of the focus shifts to what the media is calling "pent-up risks."

So what are pent-up risks? Well, a simple example might be rent control. Once those controls are loosened, landlords usually hike rents quickly to make up for lost time and revenue. That lost revenue in part stems from inflation or increased costs associated with owning and renting the property.

Yea, we realize their telling us there's no inflation, but that's a relative term. In a recent interview Chicago real estate mogul and billionaire Sam Zell, in responding to a question about how angry Americans are today, an obvious political question, responded:

The American people are extraordinarily angry. The American people are extraordinarily depressed. The last time we had anything like this in my opinion was 1979. [To a statement regarding Trump’s popularity Zell responded]:  It's because you guys are sitting here in New York City and you're not in Des Moines. And you're not in Boulder and you're not all over the country. And you're not seeing the enormous disparity that has existed between you know the coasts and the rest of the country. We have a lot of very unhappy people and I think this election is reflecting it. And I think it will be very dangerous.

Zell's comment, in our view, defines the meaning of the term relative.

Before the big real estate crash a few years ago, when prices were soaring, the standard response to anyone who questioned it, was don't worry, it's mostly bi-coastal. Well, when that Humpty Dumpty came crashing to earth, it was hardly bi-coastal after all.

The WSJ describes some of these pent-up risks today as: 

Historically, inflation was the risk the Fed worried about when it held interest rates low. This time, the Fed would actually welcome a rise in inflation, which has consistently undershot its 2% target. Its greater concern in recent years has been that low interest rates would fuel unsustainable asset bubbles. It has concluded that the boost to employment it achieved with easy policy now would outweigh the potential harm of a bursting bubble later.

This next quote is telling in itself.  It’s a calculated bet. The harm from financial disruptions is much less predictable than from inflation, because it involves linkages that are apparent only under stress.

There's two things in that first paragraph to note: One, like that old saying, be careful what you wish for when it comes to inflation. Second, the trade off for no bubble now but what could be an even larger one later in the name of jobs. Is that really a calucated bet you want to take? Ansd is it the true job of the Federal Reserve?

Betting on the unexpected comes with risks, too. But in our view, the odds for success there are improving all the time. You might want to think about focusing on whatever is extremely cheap today, another one of Zell's known characterisitcs.

We printed the above chart for the second time in a few days for a reason.


 

DOWN IN THE OIL PATCH

Down in the oil patch has really always been about Capitol Hill. It's not often that both sides in a conflict come away winners. But that's what seems about to happen when Repulicans and Democrats finally take down the nation's 40 year ban on exporting oil.

Like most issues of this kind and magnitude, you find unhappy campers on both sides. But the bill looks set to make it through both chambers and get signed into law.

NEW YORK (AP) — The U.S., seemingly awash in crude oil after an energy boom sent thousands of workers scurrying to the plains of Texas and North Dakota, will begin exporting oil for the first time since the 1973 oil embargo. The lifting of the embargo is part of a spending deal expected to be pushed through the House and Senate by the end of the week. Here’s a brief look at why the ban was in place, and the reasons why that ban is now being lifted after four decades.

The end to the four-decade ban on U.S. crude exports was the big prize in the budget battle for Republicans, who saw it as an arcane policy given the nation’s exploding production of oil and natural gas. In return, they agreed to the demand from Democrats for a five-year extension of credits for wind and solar energy producers and a renewal of a land and water conservation fund. Democrats also blocked a push by Republicans to GOP proposals to impede Obama administration clean air and water regulations.

The above article appeared on fuelfix.com/blog/2015/12/16/heres-why-the-u-s-will-export-oil-for-first-time-in-decades.

Early stories suggest big oil will be the winners in the oil pact has. We gave yet to see any about who the big winners in solar and win are.

OVERNIGHT

Well, the Fed spoke and apparently most markets liked what they heard.

Japanese stocks rallied on the news over night even in the face, as Reuters reported, of a worse that expected data on exports for November.

TOKYO, Dec 17 Japanese stocks rallied on Thursday morning after the U.S. Federal Reserve announced a gradual tightening cycle with its first rate hike in nearly a decade, boosting sentiment and risk appetite enough for investors to shrug off worse-than-expected Japan export data for November.

The 3.3 percent fall in exports from a year earlier compared with a 1.5 percent decrease expected by economists in a Reuters poll, but the impact was softened as investors took the U.S. rate hike as a mark of confidence in the world's largest economy.

The Nikkei share average had gained 2.3 percent to 19,483.38 in midmorning trade. 

And Japanese exporters smiled when they saw the yen weaken further against the dollar.

The WSJ noted the following;  The Nikkei 225 was up 2.3% on Thursday morning, after a 2.6% rise on Wednesday. It is one of the best-performing markets in the world this year, rising almost 12%, compared with a flat performance for the S&P 500.

This partly reflects a view among investors that the Fed is doing theBank of Japan’s job for it, by driving up the dollar against the yen. A cheaper yen boosts competitiveness and flatters profits for Japan’s exporters.

This currency effect explains why Japanese equities have tended to outperform when the U.S. tightens monetary policy. In four such cycles since 1994, in the month following an initial rate increase by the Fed, Japanese equities have performed better than any other major market except rival Asian exporter Korea, according to Daiwa.

A dollar now buys 122.6 yen, compared with 121.5 yen at the start of November. But the yen remains stronger than it was in August, when a dollar was worth more than 125 yen.

INFREQUENT BUT PAINFUL RUBS

Given all the turmoil and concern about divergence, this is a no brainer if you're a dyed-in-the MSM conventionality follower.

Take a look at a CRB index chart or read up on the fate of emerging markets since much of this economic mess began. The two in many ways are inseparable, commodities and EM.  So, as the headline on this article from MarketWatch.com reveals, "What the big money is betting on for 2016," is hardly mystifying in the least.

They're simply taking what the market has given them. In short, more of the same. But markets are full of surprises and often quite perverse. We're simply making a point, not criticizing. The term big money is loaded, implying big insights and a certain exclusivity beyond that of the masses.

And that might well be. But big money is not always correct. The recent track record of hedge funds states otherwise, particularly those macro-hinged. But, as a friend likes to put it, there's the infrequent but always painful rub. "Anyone can diagnose a common disorder when it arrives dressed in common, textbook fashion. But a really good diagnostician can recognize it when it shows up dressed for the Mardi Gras."

   As the chart shows, commodities rest at 40-year lows.

marketwatch.com/story/what-the-big-money-is-betting-on-for-2016-2015-12-16

OVERNIGHT

Gold, the notorious non-yielding precious metal, eased upwards after two days of losses to settle at $1,045.85 an ounce. This came after setting a six year low earlier this month in the face of Wednesday's expected rate hike and the strong dollar. Gold prices and a strong dollar are like oil and water; they don't go together.

In other metals copper remained weak as uncertainty about a global recovery anytime soon continues along with what some see as the divergence meme popularized of late by MSM. To say commodities for the most part have been soft is an understatement given the damage in emerging markets this year.

The up move in the Dow carried over to Japanese equities early Wednesday and higher energy prices for the second straight day didn't hurt the cause either.

In other news Tuesday, Argentina's central bank in its first post-election move bumped up interest rates on a tranche of fixed-deposits ahead of what many expect will be a big debasement of its peso.
Freeing up capital controls will likely weaken the official peso exchange rate. Local market sources said they expect the rate to weaken to around 13.5 to 15 to the greenback, versus the current rate of 9.8 per dollar, Reuters reported. 

According the WSJ, Argentina currently suffers from roughly 25% annual inflation, the biggest fiscal deficit in three decades, a shortage of U.S. dollars needed to pay for imports, and poverty that nears 29%. Argentine exporters also say an overvalued currency makes local goods uncompetitive abroad.