Monthly Archives: April 2012

The iShares 20+ U.S. Treasury Bond Fund (TLT) has often exhibited wider daily trading swings than the S&P 500 SPDR Trust (SPY). This quirk alone has made it difficult for me to embrace the long end of the treasury bond curve.

Instead, I have been more apt to stick with intermediate investment grade corporate credit, as well as short-term and long-term high yield corporate bonds. Granted, governments and central banks can print paper or create an electronic equivalent out of thin air. Yet corporate balance sheets also benefit when a central bank pursues an “easy money” policy.

Indeed, virtually all of the Income ETFs in my client portfolios have been successful producers. Even as capital appreciators, each sits at or near 52-week highs. I am talking about vehicles like iShares Intermediate Corporate Credit (CIU), Guggenheim BulletShares 2015 High Yield Corporate (BSJF) and SPDR Barclay High Yield Bond (JNK). I am also talking about taxable account winners like PowerShares National Muni (PZA), as well as opportunistic purchases like Guggenheim Multi-Asset Income (CVY) and PowerShares CEF Income (PCEF).

I have been exceptionally pleased by the low-risk/reasonable reward associated with the above-mentioned income producers. And yet, I freely acknowledge having underestimated the ongoing appeal of treasuries.

Earlier, I mentioned one reason that I avoided them… volatility at the long-end of the curve. Secondly, I imagined that price gains for the ETFs would be limited by record low yields. What is more, any sign of inflation, above-anticipated economic growth, foreign government reluctance to acquire double-A-rated sovereign debt and/or a change in Federal Reserve monetary policy could have adverse effects on the asset class.

Equally compelling, the CBOE VIX Volatility (VIX) relative to the S&P 500 SPDR Trust (SPY) has trended lower for 7 months. With the fear in the “fear gauge” waning and with stock assets gaining, wouldn’t it be reasonable to expect that investors would leave Treasury Bond ETFs and shift into Stock ETFs?

Reasonable analysis or not, Treaury Bond ETFs like iShares 7-10 Year Treasury (IEF) are sitting near 52-week highs. In other words, buyers of safe haven assets are as dedicated as risk-on purchasers of S&P 500 stock assets. Maybe more so!

With the CBOE VIX Volatility near 52-week lows and the S&P 500 near 52-week highs, it may be difficult to pin the reason for treasury bond popularity on investor fear. Equally likely, investors are buying what the Federal Reserve is buying; that is, if the central bank is purchasing shares in the middle of the curve, maybe you should too. It has been both profitable and safe.

Regardless of why U.S. Treasury Bond ETFs are popular — whether investors are “following the Fed,” avoiding stocks, or embracing non-European sovereign debt — the uptrend remains intact. And for some folks… nothing else matters.

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Tags | “best income etfs 2012″, “etf downtrends”, “treasury bond etfs”, ETF Uptrends, High Income ETFs

While there was a lot going on in the sector space during the rally from October to April and the pullback earlier in the month, I have yet to see any sort of detailed explanation of what happened during these two periods.

This week’s chart of the week below attempts to bridge this gap, with a four-chart comparison of the bull move from October 4, 2011 to April 2, 2012 as well as the bear pullback from April 2 to April 10, 2012. The top two charts cover the bull move, with the left chart capturing absolute sector performance and the right chart capturing sector performance relative to the changes in the S&P 500 index as a whole. The bottom two charts also have absolute sector performance on the left and relative sector performance on the right, but this time during the April 2-10 pullback.

The absolute data show that all sectors moved up during the bull move and fell during the bear move. The relative data allow for a more nuanced analysis that shows financials (XLF) were the main engine behind the bull move and also the largest contributor to the pullback. While financials shared some of the credit with consumer discretionary stocks (XLY), industrials (XLI) and technology (XLK) on the way up, it was materials (XLB), energy (XLE) and industrials that helped to pull the broader index down. Only two sectors have outperformed the S&P 500 index on the way up and on the way down: technology and consumer discretionary. Conversely, energy has been the only laggard in both directions.

While not reflected in the charts, in the three weeks since the April 10^th bottom, consumer discretionary, materials and industrials have been the biggest contributors to bullish moves. Interestingly, technology has now flipped to being the biggest drag on performance.

One could make a fairly good case that the ability of the S&P 500 index to make a run at 1500 (take a bow, James Altucher) will in large part be a function of the degree to which technology returns to a leadership role.

Related posts:

• Chart of the Week: Looking for Sector Leadership
• Chart of the Week: A Month of New Sector Leadership
• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves
• Market 2.0
• August Sector Recap
• Bullish Case Losing Traction
• The Energy and Materials Rally
• Financials and Real Estate Power Yesterday’s Rally
• What Fell and What’s Bouncing
• What’s Working? A Sector Overview

[source(s): StockCharts.com]

Disclosure(s): long XLY at time of writing

Let me start with a proposal about politics that would get wide agreement:

The 2012 election will be significant for the economy and the financial markets.

Getting a handle on this requires understanding the nature of the American Voter — a special breed. The long series of election studies shows that voters have strong opinions but often lack information.

The latest story on this line cited a Pew Poll asking people a simple question: Who is the Chief Justice of the US Supreme Court?

If you know the asnwer, put yourself in the top 25% of the population. I understand that most people might not know, but some responses are amazing. 8% said “Thurgood Marshall” proving that they had heard of this famous Justice and former Solicitor General. They did not seem to know that he had never been the Chief Justice nor that he died in 1993. 4% cited Harry Reid! A little confusion of the branches of government.

A few years ago I reported that 80% of the people could name two of the Seven Dwarfs, but only 30% could name two Supreme Court justices. Who do you think is the best-known Justice?

Background

As a former poli sci prof, I have studied every presidential election since Truman in 1948. As an undergrad student, I did an analysis of voting data on the Kennedy/Nixon debates in 1960. When I started in the financial markets in the late 80′s I looked to the analysis of politics as something that would provide an investment edge — and it has.

I do not engage in political advocacy at “A Dash.” I am a political agnostic when it comes to investing — seeking to profit no matter who is in power. I have opinions that I share with friends and express in the voting booth.

Here in Illinois we have our own system of term limits for politicians: One term in office and one in prison! I have voted for officials from both parties.

I am trying to put this expertise to work, but the crystal ball is still cloudy for this year.

The 2012 Election

I have not yet suggested investment conclusions for this year, but it is an active research project. It was only last week when we learned, for sure, the GOP nominee — my prediction in my January year-ahead interviews. We can now start analyzing the actual policy differences, as opposed to the skirmishes we are already seeing this week.

Each week will provide some additional clarity, but there is a problem.

The most important issues for investors require significant knowledge and analytical skill. The most salient issues for voters are things that anyone can understand.

We can see this taking shape.

Investor issues include the following:

• Economic growth — stimulus, the Fed, and deficits.
• Regulation — more or less. Big business or small.
• Health care — how much and how to deliver.
• Supreme Court Appointments — judicial philosophy and policy dispositions.
• Foreign policy — leadership, peacemaking, diplomacy, and command skill.

and we are just getting started.

Things of interest for the electorate include the following:

• Treatment of pets no matter how long ago. (LBJ caused a controversy in playing with his dogs, “Him” and “Her” by lifting one by the ears — picture below).
• What someone in the campaign said about the role of mothers and work.
• How quickly we should fire misbehaving government officials.
• Whether the leader ever changed his mind about something.

Notice the difference in the knowledge and skill required. The latter list of topics is something where everyone can have an opinion with little information. The opinion is based upon everyday experience. Yours is as good as mine.

Investment Conclusion

The big issues will eventually be important, but I do not see it so far. At the moment we just have a spectator sport. There is no reason to jump the gun with investment picks.

If support can be held on the Wilshire5000 – roughly 14,560 – then it will be able to challenge and make new recovery highs. If support fails, then there could be a violent selloff reaction resulting in a wave (iii) down.

So the major resistance has been pushed through and challenged. If  it holds, then this is not a wave (ii), but likely wave [v] of C.

The bear count is again simple.  If support fails to hold, downside surprise is possible.  It would be labeled wave (iii) down.

Its actually a good price point for a short entry attempt. If support fails then good gains can be made. If support holds then the stop would be today’s price peak.

The CAC is a good proxy perhaps for what may happen overall with European and American markets. The CAC is likely in a wave [ii] bounce which means the American markets likely will bounce further also.  Which means a non-confirmation if the SPX manages new highs above 1422 and the European market do not.

The GDOW is also telling a wave story. 5 waves down from the recent counter-trend high like the CAC.

Weekly Wilshire shows the big picture. major divergence on the RSI and total volume drop-off is just sickly and MACD history bars are on the verge of negative.

If the Wilshire can continue to push up we have resistance spanning from the recent 14,951 – 14990 (2000 peak).

Although the IMF succeeded in raising $ 430B for protection of financial stability, the market was not as excited as expected. Indeed, investors continued to worry about the sovereign debt crisis in the Eurozone which has shown signs of worsening. In the middle of the week, S&P’s lowered the credit rating of Spanish debts by 2 notches to BBB+, with a negative outlook.

Another focus was the April FOMC meeting at which the Fed maintained the policy rate unchanged at 0-0.25% and did not add further monetary easing measures. However, Fed Chairman Ben Bernanke reiterated that the central bank has ‘prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target’. The language to leave interest rates at exceptionally low level at least until mid-2014 remained unchanged.

Speculations for further monetary easing increased after the US reported that GDP growth eased to +2.2% q/q in 1Q12, from +2.95% in the prior quarter. Consumer spending expanded rapidly but was offset by slowdowns in fixed investment growth and inventory investment slowed significantly.

For the coming week, the RBA meeting will be held Tuesday. The market is pricing in a rate cut of 25bps in May. On Thursday, the ECB and the BOE will also decide on the monetary policies. Both will probably stand on the sideline this month.

The energy complex gained last week but both WTI and Brent crudes remained in range-bound trading. Although a mild selloff was seen after news that Iran would halt nuclear expansion in order to avoid further sanctions, market reaction was just temporary as it was later reported that sanctions would be lifted only if significant progress is made on capping uranium enrichment at the Fordo site.

Natural gas staged a strong rally with the front-month Nymex contract gaining more than +10% and ending the week well above $ 2.00/MMBtu for the first time since the beginning of the month. Downside risks remained due to the injection season. The DOE/EIA reported that gas inventory increased +45 bcf to 2 548 bcf in the week ended April 20. Stocks were +872 bcf above the same period last year and +908 bcf, or +55.4%, above the 5-year average of 1 640 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -18 units to 613 in the week ended April 20. Oil rigs dropped +9 units to 1 328 and miscellaneous rigs stayed unchanged at 4 units, sending the total number of rigs to 1 945 units. Directionally oriented combined oil, gas, and miscellaneous rigs slipped -3 units to 243 while horizontal rigs decreased -6 units to 1 139 and vertical rigs dipped -8 units to 563 during the week.

Gold was the outperformer in the precious metal complex last week. The +1.33% rise outweighed the losses recorded by silver and platinum as well as the +0.68% gain in palladium. The yellow metal was buoyed after the April FOMC meeting as Fed Chairman Ben Bernanke signaled that further easing is still possible. Moreover, disappointment in the US GDP also fueled speculations of further stimulus.

Physical demand in the retail sector in India has been sluggish ahead of the second- largest gold festival, Akshaya Tritiya, ahead of the review of import duties. Yet, official demand remained strong. The IMF data indicated that Mexico, Russia and Turkey added about 44.8 metric tons valued at $ 2.40B to reserves in March.

Saturday, April 28, 10:45 a.m.

After stumbling the previous two weeks, the U.S. market has partially recovered over the last two weeks. This past week it showed surprising resilience, with 1st quarter earnings reports, primarily from Apple and Amazon, overwhelming the string of further negative economic reports from the U.S., Europe, and Asia.

It has the S&P 500 now down only 0.4% for the month so far, after last week’s big 1.8% gain. But closing at 1,403 it has it again entering the area of overhead resistance that began causing it problems in mid-March.

Next week will be a huge week of important economic reports, in the U.S. and globally, as well as more earnings reports, ending the market week on Friday with the potentially game-changing monthly employment report for April, and closing out the calendar week on Sunday with the critical May 6 elections in Greece and France that could change the future of the eurozone.

In the U.S. it will be, in order of appearance; Personal Income & Spending. The last report showed consumer income up only 0.2% but spending up 0.8%, a seemingly unsustainable situation; the Chicago PMI report, closely watched as often being a harbinger of national reports; the Dallas Fed Mfg Index; the national ISM Mfg Index, Construction Spending; auto sales; Factory Orders, the ADP monthly jobs report for April; new weekly unemployment claims; Productivity; the ISM non-mfg (services sector) Index; and culminating on Friday with what I have always called The Big One, because it so often comes in with a surprise that results in a 1 to 3 day triple-digit move by the Dow in one direction or the other. That is the Labor Department’s monthly employment report, this time for April.

And that’s only the U.S. reports.

Globally, we will see the PMI reports from Asia, including China and Japan, and from European countries as well as the overall 17-nation eurozone.

And of course 1st quarter earnings reports will continue.

Should economic reports be negative, will earnings be able to overcome the negativity again?

So far 57% of S&P 500 companies have reported, and 72.8% beat Wall Street’s forecasts.

Does that mean earnings are robust or that Wall Street was once again adept at lowering earnings forecasts to levels that will be easy to beat?

It does make you wonder when for instance you see Ford report, as it did last week, that its revenues were down in the 1st quarter, and its earnings plunged a huge 45%, but that beat Wall Street’s estimates, and the stock moved higher.

But perhaps the economic reports will also be positive, indicating the slowdown of the first quarter was only a temporary soft spot, and economies in Europe that are already in recessions will begin to pull out of them quickly.

Obviously, it will be a very important week.

Negative Divergences Persist.

While most of the U.S. market indexes have looked impressive in their recovery of the last two weeks, the troubling negative divergence of the DJ Transportation Average has continued.

That’s troubling because the Transports often lead the rest of the market, and they have not even recovered all the way from last summer’s correction, still showing a 52-week loss. And shorter-term they reached a peak in early February, rallied back to it in by mid-March, and topped out again, potentially leaving a bearish double-top in place.

It would seem the excitement in the rest of the market last week would have been a good time for the DJ Transportation Avg to catch the fever and play some catch up if it’s going to. But it managed only a spiritless 0.6% gain for the week compared to the S&P being up 1.8% and the Nasdaq 2.3%.

That is not the only negative divergence. The U.S. market remains in an odd negative divergence with most of the rest of the world.

It seems the most odd when we consider that the U.S. economy grew only 2.2% in the 1st quarter and seems to still be slowing. Meanwhile, for instance, India’s economy is slowing but is still at what the U.S. would love to have, GDP growth of roughly 6%, and China, where growth is slowing but so far only to around 7%.

And yet their markets are worried and have not come close to recovering to their levels of a year ago, while the U.S. market remains happy.

The divergence also shows up with even the strongest European countries.

Let alone some of the weakest.

A Big Thank You To:

The Bull and Bear Financial Report (www.thebullandbear.com) for often featuring my weekly columns in its respected publication, most recently ‘Beware of Defensive Stocks!’

Decisionpoint (www.decisionpoint.com) for including all my columns in its Top Advisors Corner.

Stockhouse.com (www.stockhouse.com) and Financial Sense (www.financialsense.com), Business Insiders (www.businessinsiders.com), Seeking Alpha (www.seekingalpha,com), Forbe’s (http://www.forbes.com/sites/greatspeculations/2012/04/27/fed-learns-virtue-of-being-fashionably-late-in-rescuing-stocks-economy/), CoreCompass (www.corecompass.com), Elliott Wave Market Service (www.elliottwavemarketservice.com), eZine Publications (www.ezinearticles.com), and Articlesbase (www.articlesbase.com) for publishing my columns.

If others have joined our network and I’ve left you out, please let me know so I can give you a shout-out.

Subscribers to Street Smart Report: In addition to the information in the premium content’ area of this morning’s blog, this week’s new issue of the newsletter is in the subscribers’ area of the Street Smart Report website.

To read my weekend newspaper column ‘The Fed Will Come To the Rescue But Deliberately late’ Click here.

Yesterday in the U.S. Market.

It was another somewhat positive day in the U.S. market yesterday, on light volume of 0.7 billion shares traded on the NYSE. The Dow was up 62 points at its high but sold off late in the afternoon, to close up 23 points.

The Dow closed up 23 points, or 0.2%. The S&P 500 closed up 0.2%. The NYSE Composite closed up 0.3%. The Nasdaq closed up 0.6%. The Nasdaq 100 closed up 0.6%. The Russell 2000 closed up 0.9%. The DJ Transportation Avg. closed up 0.6%. The DJ Utilities Avg closed up 0.3%.

Gold closed up $ 3 an ounce at 1,663.

Oil closed up $ .32 a barrel at $ 104.87 a barrel.

The U.S. dollar etf UUP closed down 0.2%.

The U.S. Treasury bond etf TLT closed up 0.1%.

Yesterday in European Markets.

European markets closed up yesterday. The London FTSE closed up 0.5%. The German DAX closed up 0.9%. And France’s CAC closed up 1.1%.

Global markets for the week.

A positive week in the U.S., not so much elsewhere.

Premium Content Area.

For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.

To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.

In the Premium Content section this morning: U.S. stock market. Gold. Bonds.

Next week’s Economic Reports:

Next week will be a very heavy week for potential market-moving economic reports, including the Chicago PMI, ISM Mfg Index, Factory Orders, and what I always refer to as The Big One, the Labor Department’s Monthly Employment Report. To see the full list and times for each release click here, and look at the left side of the page it takes you to.

To read my weekend newspaper column ‘The Fed Will Come To the Rescue But Deliberately late’ Click here.

Subscribers to Street Smart Report: In addition to the information in the premium content’ area of this morning’s blog, this week’s new issue of the newsletter is in the subscribers’ area of the Street Smart Report website.

I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m.

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negative divergences

When the CBOE made a push to expand interest in weekly options about two years ago, their efforts were initially met with a fair degree of skepticism. Over time, however, weekly options have found a dedicated following, with the CBOE “weeklys” growing from 1% of total volume to about 15% today. Two years ago there were a handful of index weeklys, as well as a handful of weekly options based on ETPs and individual stocks. The list of weekly options changes every week, but the current list for weeklys expiring on May 4^th now includes options on six indexes, 26 ETPs and 119 individual stocks. What was once a curiosity is now a groundswell.

Personally, I have found quite a few uses for weekly options. On Tuesday, for instance, I tweeted that the VXX 18/19 call spreads had the same price for the weekly options as next month’s standard May 19^th expiration.

Part of the appeal of the weeklys can be seen in the graphic below of the skew in Amazon (AMZN), where today’s April 27^th weeklys (red line) have a huge implied volatility (and therefore price) premium to their counterparts with more distant maturities. Looking at the graphic, one can see that it is not that difficult to construct positions with weekly options (which also include the May 4^th options, shown with a yellow line) in which one leg has implied volatility that is 50-100% higher than another leg. If you have a bias toward selling options, as I do, this can sometimes offer up an irresistible mathematical edge.

Lately when I find myself editing my various watch lists, one of the first things I check for is whether the underlying in question has weekly options. If you have weeklys, you are in the big leagues and there are so many more trading opportunities. With ZNGA weekly options being added this week, for instance, the ease and flexibility of trading this issue around yesterday’s earnings report was dramatically improved.

If you haven’t tried weeklys yet, you are missing out. And if you think the volumes are too small and the markets are too thin, think again.

[Note that an excellent source of information for all things related to weekly options is the CBOE Weeklys splash page.]

Related posts:

• Weekly Options Gain Momentum
• What a Difference a Weekly Makes
• Weekly VXX Options Coming on September 28

[source(s): LivevolPro.com]

Disclosure(s): short VXX and ZNGA at time of writing; Livevol is an advertiser on VIX and More

Adjusted the bullish count to allow this as wave (iii) of [v] up.

SPY back in the upper gap.