Correction time? A quick look at stocks, bonds, gold, and the dollar…

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Quotable

“Cat: Where are you going?
Alice: Which way should I go?
Cat: That depends on where you are going.
Alice: I don’t know.
Cat: Then it doesn’t matter which way you go.”

― Lewis Carroll, Alice in Wonderland

Commentary & Analysis

Correction time?   A quick look at stocks, bonds, gold, and the dollar…

I know it may sound odd, especially given what we’ve seen lately, but markets do correct.  And usually, albeit these times may not be usual, markets correct when most of the players become complacent.  I realize saying such is a simplistic and trite trading axiom, similar in tone to buy low and sell high.  But it seems, at least qualitatively, complacency rules the day.  Stocks are going higher, the dollar is going higher, interest rates are going higher and everyone knows it.  It may not yet be a one-way bet crystalized consensus, but there may be a flashing yellow light we aren’t yet seeing. Time for a playable correction in key markets may be upon us. 

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Below are some of the pictures I follow each day and share with Black Swan clients; included are stocks (SPY etf), bonds (TLT etf), gold (GLD etf) and US dollar ($ Index).   Based on the technical setup, I am thinking a playable correction may be close, or it has already started for each of these markets (we went long bonds in TLT on Wednesday in our Key Market Strategies service).  And waiting for a bit more conformation to exit short gold (GLG) and go long.  The expectation here is these “corrections” will be at least multi-week in duration.  That said, we never know when a “correction” turns out to be a change in trend.  Stay tuned. 

Stocks (SPY):  Turning over aka a distribution top?

Bonds (TLT):  Rates seem ahead themselves given the macro environment….

Gold (GLG):  We have seen a tight correlation between gold and bond prices, as you can see clearly by comparing the GLG chart below with the TLT chart above.  So a bond correction should help gold if the correlation remains intact.   

US Dollar Index (DXY):  Daily momentum has turned down…

And my friend Victor reminded me about the Economist magazine cover this week—the course of the cover:

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Have a great week. 

Jack Crooks

President, Black Swan Capital

jcrooks@blackswantrading.com

www.blackswantrading.com

772-349-6883

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Time for a US $ Correction? USD/JPY short a fav...

USD/JPY Daily:  Momentum is clearly waning, but has not yet turned down.  However, the count in the chart you see below shows that Wave C, which ended at 114.82 high, is exactly 1.618 the length of Wave A (a common extension in Elliott Wave Theory for a C corrective wave).  I still believe the yen will be a very good candidate to short on any stock market correction (and despite the investment world always believing a weak currency is the best outcome, citizens and importers inside Japan aren't happen losing all this purchasing power).  Plus, the mechanism in which the Bank of Japan is trying to manage its yield curve is wrought with unintended consequences.  

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Trump Triggers a US Dollar Virtuous Circle?

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Quotable

"You can always count on Americans to do the right thing—after they’ve tried everything else."

-- Winston Churchill (actually Abba Eban in March 1967)

Commentary & Analysis

Trump Triggers a US Dollar Virtuous Circle? 

As you well know, markets have reacted very favorably to the recent election of Donald Trump to be the next US President, despite the continued obsessive sniping among the mainstream press and assorted metrosexuals (defined as hubris-filled big city dwellers).  Market players are betting on the benefits that might flow to the US economy from the set of tax, regulatory, and fiscal policies Donald Trump has outlined.  Interestingly, history at least rhymes here, as we saw an economic boom in America triggered by a very similar set of policies enacted during President Ronald Reagan’s first term in office.  The core of Reagan’s economic policy agenda was lower taxes, fewer regulations, and increased defense spending; surprising similar to Mr. Trump’s proposals, albeit articulated differently. 

The Reagan Era led to a Virtuous Circle of money flow into America at the time, and it triggered a huge rally in the US dollar and launched the US economy into a real growth trajectory following the inflation prone morbidity of the 70’s.  There is a very good chance we could see a repeat under the tutelage of a President Donald Trump.  We may again be entering a Virtuous Circle for the US dollar?  Let’s take a look at the drivers and potential risks to this scenario which now seems the favored bet…

The chart below compares the US dollar index to the 30-year US benchmark interest rate; I have outlined [rectangular box] the period from 1980-1986 and coined it the Reagan Virtuous Circle for the US dollar.  US interest rates soared initially after Reagan was elected, pushing the US into recession (likely volitional as Fed Chairman Volker was determined to crush inflation).  Rising interest rates and policy changes triggering fresh new entrepreneurial growth launched the US dollar index into a massive rally phase not witnessed anytime since the major currencies began floating.  

The huge rally in the dollar during the early eighties is understandable (in retrospect of course as most things are); when you consider in terms of the three pillars which drive a currency’s value:

We can further breakdown the three pillars into details to see how positive policy changes can trigger growth, rising yield, and money flow. I hope the diagram below will help you better understand why this process can become self-reinforcing…[note I have kept the color-coding: growth related is green, interest rates grey, and money flow blue]…

But there are significant risks to this scenario and I would place the legislative risk number one at the moment.  The honeymoon will likely be short for Mr. Trump given the forces aligned against him and the stark policy differences among not only the Democrats, but many within the Republican Party elite.  If the tax and regulatory policies do not get enacted, the virtuous circle bet could be quickly reversed.  If only some of the policy is enacted or watered-down, the stuff now baked into the cake of asset values will reverse to at least some degree…

Given that market players now seem to have made many one-way bets: long the dollar, long stocks, and long interest rates, my favored scenario is a little shakeout here by Mr. Market, reversing all those trades to some degree, during the transitionary phase where by expectations are realigned with reality and the time it takes for said policy changes to flow into increased corporate profitability and consumer income. 

 

For instance during the transitionary phase: Policy changes will not be enacted immediately.  Fiscal stimulus will not be a growth multiplier immediately.  The huge debt burden facing developed world nations will not subside immediately and in fact the problem has grown more severe with the run up in the US dollar and surge in interest rates.  Friction may develop on the trade policy agenda.  And the left will do their best to derail as much of Trump’s legislation as possible. Rising rates and an emboldened Fed will likely reduce liquidity at the margin. 

I have already been trying to play for a dollar correction given my expectations for a transitionary phase.  Unfortunately my currency ideas have been crushed lately by the runaway freight train (aka the US dollar).  Maybe there will be no transitionary phase.  Maybe the US dollar Virtuous Circle has started and will not end for some time.  Maybe it’s time to capitulate ASAP to this dollar trend and forget about trying to play corrections.

Even if you get the macro right, it’s never easy when playing for real money in highly levered markets.  If anyone spots Mr. Hindsight, please send him my way.

[As an aside…here is one bet I think we can make with confidence.  If in the months/years ahead, should President Trump’s policy changes lead to a considerable improvement in US economic growth you can bet the Neo-Keynesian crowd will attribute all the success to increased fiscal stimulus.  But if Trump’s policy changes are to work, the core driver will come from fresh new business formation triggered by the reduced burden of draconian regulations and taxes on the small- and medium-sized business.  Stay tuned.]

If you wish to consider Black Swan subscription-based services, you can do so at our website.  Please don’t hesitate to request samples or a free trial.

Jack Crooks

President, Black Swan Capital

jcrooks@blackswantrading.com

www.blackswantrading.com

Comment

Quick View Chart: NZD/USD Hourly…recovery?

22 November 2016/10:55 a.m. ET

[Last 0.7035]:  The NZD/USD daily chart is looking very interesting—symmetry suggesting at least another minor recovery is due before a big break lower.  The hourly setup tends to support the recover view with minimum target to 0.7144 (38.2% retrace); but with scope for more on the back of the rebound in key commodities. Below the hourly chart indicates a decent probability a five wave impulse sequence is complete at 0.6982; which also represent critical support near-term (daily momentum is flat and starting to work higher).  Near-term showing another push lower in minor Wave (b) of and expected correction higher.  Waiting for a turn in near-term momentum before pecking long…

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NZD/USD Head & Shoulders + Symmetry

NZD/USD Head & Shoulders + Symmetry

21 November 2016/5:09 p.m. ET

Below is a daily chart of NZD/USD.  Three key points:

  1. Today was a key-day reversal bar suggesting a correction higher from oversold may about to get underway…
  2. There is a head and shoulder pattern setup as labeled; suggesting the next move after any correction higher will be a very deep trend move lower…down into the low 60 cent level…
  3. Perfect symmetry in number of days from the pattern swing-low-high and high-low setup; i.e. 53 days. 
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Hodgepodge

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Quotable

“You are welcome, most noble Sorceress, to the land of the Munchkins. We are so grateful to you for having killed the Wicked Witch of the East, and for setting our people free from bondage.” 

― L. Frank Baum, The Wonderful Wizard of Oz

Commentary & Analysis

Hodgepodge

You made my day! 

You made my day! 

Ut Oh! It’s the Rickshaw Man (doji).

A gap open on Thursday morning, ending in a doji candlestick.  With the long wicks on both sides, this is known as a Rickshaw Man…indicates major indecision.  Bulls and bears buying/selling power equalized.  A doji is often seen as a single bar reversal pattern.  A sell-off here wouldn’t surprise as it seems lots of profits to grab since Donald Trump’s victory last Tuesday evening. 

Emerging Markets diverging from developed markets…hmmm…

Maybe the crushing of EM bonds and background concern about the continue depreciation of the Chinese currency could be the drivers (chart next page)…and this news this morning likely doesn’t help…

BEIJING, Nov 11 (Reuters) - Chinese banks extended 651.3 billion yuan ($95.56 billion) in net new yuan loans in October, below expectations and falling sharply from September, as policymakers pledged to prevent asset bubbles in the increasingly debt-fueled economy.

The People's Bank of China has been keeping policy accommodative to spur growth - as evident by record bank lending so far this year - but it faces an uphill battle to divert money from the red-hot property market into the weak real economy.

Emerging Market Bonds (EMB in red) versus EM stocks (EEM black) versus Chinese yuan-US$ (Blue)….Notice the red line going straight down (slam); those are EM bonds.  Contagion risk abounds given the amount of debt build in EM markets as discussed here before. 

Big CAD versus Copper Divergence Setup: Buy CAD?

MELBOURNE, Nov 11 (Reuters) - London copper was on track for its biggest weekly rally in over 35 years on Friday as hopes of U.S. infrastructure spending on Donald Trump's election win and firming demand from China drag metals out of a years-long bear market.

Copper CMCU3 was trading up 3 percent in late Asian trade, rising for a seventh straight session and up more than 15 percent for the week, on track for its biggest weekly rise since 1980, according to Reuters data.

Copper (black line) versus CAD/USD (green line) Daily:  A big divergence has opened here.  Maybe time to consider buying CAD…it has been hit. 

The problem is CAD seems more captive to oil prices at the moment (oil down 3.3% at the moment), then copper obviously…below a chart of CAD/USD versus Oil Futures (WTI):

So, if oil bounces, CAD is likely a buy.  But my confidence still not high, as the Donald has propelled the US dollar.  Wasn’t what I was expecting (and getting whacked now pecking against it)…

What is good for a currency?

  • Foreign Direct Investment
  • Hot Money Flow

What drives these two?

  • Rising capital gains opportunities (President Trump cutting taxes and regulation would do that)
  • Rising interest rates (Seems a given; and an exclamation point will be added when Janet the Dove exits the building; most likely soon after Donald checks into the Oval Office.)

It appears the intelligentsia has done a major re-think despite all the money they threw into Hillary’s campaign and their howls of doom and gloom. 

To that point of intellectuals being so wrong consistently, I turn to the classic: Propaganda- The formation of men’s attitudes by Jacques Ellul (written in 1965):

“Ellul follows through by designating intellectuals as virtually the most vulnerable of all to modern propaganda, for three reasons:

1)      They absorb the largest amount of secondhand, unverifiable information;

2)      They feel a compelling need to have an opinion on every important question of our time, and thus easily succumb to opinions offered to them by propaganda on all such digestible pieces of information:

3)      They consider themselves capable of ‘judging for themselves.’  They literally need propaganda.

Well, an exciting week.  Have a great weekend and enjoy “morning in America.”  J

If you wish to consider Black Swan subscription-based services, you can do so at our website.  Please don’t hesitate to request samples or a free trial.

Jack Crooks

President, Black Swan Capital

jcrooks@blackswantrading.com

www.blackswantrading.com

Comment

A new dollar view and talking my book…

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Quotable

“For Lasch, that great underlying problem was clear enough: that by the end of the twentieth century, the American left and right had ‘come to share so many of the same underlying convictions, including a belief in the desirability and inevitability of technical and economic development, that the conflict between them, shrill and acrimonious as it is, no longer speaks to the central issues of American politics’ (23). That is, by the end of the twentieth century the dominant figures in American politics had all become uncritical believers in, and proponents of, the idea of progress.

“Lasch suggests that there are two problems with all this elite genuflection at the altar of progress. First, it both demeans and is disconnected from the values of most Americans, who understand that you can’t have everything, who know that everything costs something, who want stable and satisfying lives for their children, and who have been on the losing end of enough programs of ‘improvement’ to be skeptical about the dogma of progress.”

--Susan McWilliams, “On The True and Only Heaven, 25 Years Later,” Modern Age

Commentary & Analysis

A new dollar view and talking my book…

Below is a chart with Black Swan’s new wave view [aka best guess] on the future path of the US dollar.  This chart shows a very broad wedge pattern and it suggests we could see many weeks, or months, of dollar weakness going forward before the final surge in this bull market rally which began back in March 2008—not coincidentally the same day our illustrious government officials decided to “save” Bear Stearns from meltdown.

US Dollar Index Daily:  Looking for sell-off into the 93-level before another major rally leg resumes. 

Maybe this is a bit of irrational rationales or just “talking my book,” but thinking this:

  1. If Hillary wins, the dollar will likely catch a bit of a bid and go higher near-term.  But I believe it will be short-lived as general dissension in the country which will follow, as many rightfully disdain the Clinton Crime family.  Added to that, the realization among any person with a marginal pulse, the mainstream news media is nothing more than an extension of the Democratic National Committee and a strong arm of government propagandist, will leave the US quite divided for some time.  This is not the raw material for a strong dollar. 
  2. If Trump wins, the elite will be in shock, similar to what we saw with the Brexit vote.  Months of hand-wringing and dire warnings of doom will follow; as we witnessed among the mainstream British press, especially from those “bright lights” at the Financial Times and The Economist, who should have known better.  [For more on this, and why populism is such a dirty word for elites, I suggest an excellent piece which appeared in The New Criterion magazine; Populism, III: Insects of the hour, by Danial Hannan.]  Given the blow-back from the powers that be against the serf uprising, it may not be fertile ground for the US dollar for a while. 

Back to Lasch (from 1991, The True and Only Heaven):

…our obsession with sex, violence, and the pornography of “making it”; our addictive dependence on drugs, “entertainment,” and the evening news; our impatience with anything that limits our sovereign freedom of choice, especially with the constraints of marital and familial ties, our preference for “nonbinding commitments”; our third-rate educational system; our third-rate morality; our refusal to draw a distinction between right and wrong, lest we “impose” our morality on others and thus invite others to “impose” their morality on us; our reluctance to judge and be judged; our indifference to future generations, as evidenced by our willingness to saddle them with a huge national debt, an overgrown arsenal of destruction, and a deteriorating environment; our inhospitable attitude to the newcomers born into our midst; our unstated assumption, which underlies so much of the propaganda for unlimited abortion, that only those children born for success ought to be allowed to be born at all.

Enjoy the election, if you can.

If you wish to consider Black Swan subscription-based services, you can do so at our website.  Please don’t hesitate to request samples or a free trial.

Jack Crooks

President, Black Swan Capital

jcrooks@blackswantrading.com

www.blackswantrading.com

Comment

USD/JPY Daily Wave View

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USD/JPY Daily [last 102.94]

3 November 2016/1:47 p.m. ET

 Current Position

Correcting lower in Wave C of B

Price Target: 97.55

Support: 100.07/99.53

Resistance: 105.53/107.47

 Summary

The sharp reversal from the high at Wave B, 105.53, last Friday adds confirmation Wave B as labeled was corrective, and new trend move lower in Wave C is likely underway.  Based on equality, the target for Wave C is 97.55. 

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