What Bad News?

Weekly Summary:
1. S&P - uptrend still intact but under pressure (note recent yen strength, weak economic reports).
2. USD - DXY showing signs of fatigue as it struggles in its current congestion level. Expect further sideways consolidation with chances for a limited down move.
4. Euro and GBP - continue to be under pressure. Even if we get to see some USD and/or yen weakness, euro and GBP gains expected to be limited.
5. In case we get a break to the upside on the S&P, the Aussie and Canadian dollars stand the most to gain, especially against the Japanese yen.

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Despite ending the week five and a half points lower, the S&P, in an act of defiance, faded one piece of bad news after another. And they just kept on coming - consumer confidence, new home sales, core durable goods orders, unemployment claims, existing home sales - all came in worse than expected. And let's not forget Greece! Yet despite the barrage of negative economic readings and contrary to reason, the S&P managed to erase most of its losses for the week. The S&P's tight range indicates a market searching for direction while evidence of buying pressure indicates the higher probability direction is still up. Market veterans are often quoted saying that when the market is going up for no apparent reason, don't try to fight it. It's the "don't-catch-a-falling-knife" logic - only in reverse.

What's Wrong With This Picture?
I think the image below captures the market's lack of direction perfectly. Look at the head line - future fall as investors remain cautious about consumer led recovery. Yet right underneath we see that Target's profit rises 53.7%, Sears' profit more than doubles, and Home Depot beats estimates. Not too shabby.

Yen Strength - Still a Red Flag
The Japanese yen has been one of the best fear indicators in recent months. Therefore we must take note of the fact that many yen pairs slid to levels not seen since Feb 5th - the recent S&P low. In fact, Euro/Yen and Pound/Yen made fresh lows. The recent yen strength is indicative of risk aversion but the recent COT report shows that traders commitment for supporting a stronger yen is weakening. If that happens, we can expect to see a strong recovery of AUDJPY and CADJPY and a more modest one for EURJPY and GBPJPY. However if the yen continues to strengthen, we can certainly expect to hear comments from the BoJ about it and hints of interventions will once again resurface, curbing further yen advances.

British Pound - an Untold Story
Hidden in the shadows of the EU, Greece, and the euro, the British pound quietly but surely slid to new lows against its major counterparts. It has even lost ground against the embattled euro. Concerns over the UK's recovery and the possible need for further QE, combined with a looming general election and dovish statements by the BOE have sent the GBP on a downward spiral with no end in sight. As overextended as it may seem, we must not catch this falling knife as most analysts see further loses ahead. We are staying bearish on the pound.

Euro - Greece, the Never Ending Story
Last week we concluded that Greece will reemerge to take center stage after falling off the radar for a few short days. As expected, it did. Once again, the mess looks too big to overcome and renewed doubts over the fate of the EU resurfaced in force. We have to stay bearish on the euro at this point. Counter-trend moves are to be expected considering the record short positions but they will be short lived and capped below 1.38

DXY - Uptrend Showing Signs of Fatigue
Weekly chart for the USD reveals an inside bar for the week of Feb 22-26. This could signal further pause for the dollar's rally. Sideways action with limited moves to the downside are to be expected at this point:

Commitment of Traders (COT) Reports - 02/23/10

I decided it would be beneficial to follow a few other COT reports in addition to the S&P e-minis and the Dollar Index reports. So as of this week, I will post the COT reports in a dedicated segment and include the following reports:  S&P 500 (e-minis) , Dollar index (DXY), Euro, GBP, Australian Dollar, Canadian Dollar, and Japanese Yen COT.


I believe the additional reports will help us form a more complete assessment of market sentiment. So, without further ado....

CLICK ON THE GRAPHS TO ENLARGE

S&P 500 (e-mini) COT Report
This week's COT report continue to show a growing divergence between retail investors (non-reportable) and big market speculators (non-commercials). Generally speaking, this is a bullish signal. The non-commercial net-long positions are at levels not seen since March 2009.

Dollar Index (DXY) COT Report
The Dollar index COT report reveal a continued bullish stance with respect to the US dollar. Both non-commercials and non-reportables are net long on the dollar. Not all that surprising considering the state of the Euro and British pound.

 








Euro COT Report
Euro COT report is revealing - new record bets against the single currency have been recorded in this week's report.

British Pound (GBP) COT Report
The best (or worst) untold story over the last couple of weeks has been, without a doubt, the British pound. The GBP has been the worst performing currency among the majors - losing ground even to the battered euro. We should not be surprised then to see this massive net-short position against the pound:

Australian Dollar (AUD) COT Report
perhaps the only major currency that can actually claim the title "higher yielding", the AUD came under some pressure as a result of monetary tightening in China. However, market participants are still averse to short the Aussie. The COT report shows net-long positions held by both non-commercials and the non-reportables have increased over since the last COT report:

Canadian Dollar (CAD) COT Report
Much like the Aussie dollar, the loonie has held up well against the strong US dollar. Again - no big surprise when we take into account the S&P's COT report.

Japanese Yen (JPY) COT Report
Movement in Yen and changes in the JPY's COT reports do not have a high degree of correlation. However, this is still an important report. Yen is still considered the safe have currency of choice. As such, we should expect to see Yen eases if and when risk trade is back in vogue. The yen COT report is suggesting exactly that: a weakening yen:

New Home Sales Drop to a Record Low But Market Cries "Bull"

Despite a dismal number of new home sales in January, the stock market managed to stage a bounce after a two day decline (with 3 hours until closing bell, this could still change). The rise in stocks is largely attributed to Bernanke's congressional testimony in which he reiterated the need for zero rate policy for an "extended" period. In addition to the gains in stocks, we see the dollar and the yen hold on to most of their recent gains. So what does it all mean?

1. Equities - the market's muted reaction to the new home sales report is very bullish but it must be taken in context, namely, zero rate policy. For sure, cheap money supply has supported the recovery efforts. But it also had the undesirable affect of carry trades. We should not think of carry trade just in the sense of using dollars to buy other currencies. Instead, think of it in a broader sense where cheap US dollars are used to fund any number of riskier assets like stocks, bonds, real-estate, etc. Basically, with a zero  rate policy, one has no incentive to keep one's money in the form of (depreciating) cash. The stock market is showing clear signs of severe addiction to zero interest rates. We are sure to experience some sobering days in the future when the economy checks into rehab.
2. Strong dollar - How is it possible for the dollar and the stock market to rally at the same time? the answer, to a great extent, is the way we measure dollar strength, namely, the dollar index. The dollar index is a weighted index which tracks the dollar's strength against a basket of currencies, of which the euro alone accounts for more than 57% and the combination of euro+pound+yen accounts for more than 80%. This means that it's enough for the dollar to show strength against the euro and British pound in order to send the DXY higher. And there's good reason for the dollar's strength vs. the euro and the pound. While Bernanke is laying out his exit plans, the UK and the EU are knee deep in trouble with no end in sight to loose monetary policy.
3. Strong yen - We are used to seeing  a strong inverse-correlation between yen pairs and equities. When equities rise, yen eases (risk on) and when the stock market falls we normally see the yen rise (risk off). So it is important to note here that while stocks nearly regained their highs for the week, the yen stayed relatively strong, relenting only some of its recent gains. This price action is indicative of a shaky market sentiment.

For the, Dollar, S&P, Up Seems the Path of Least Resistance

Summary:

1. S&P uptrend intact. Looking for S&P to either trend sideways, or higher to re-test 1150
2. USD still in consolidation but still looking bullish. 
3. Euro still under pressure - Greece to retake center stage over the next couple of weeks.
4. GPB remains very bearish as economic fears plague the UK.

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Despite being a day short, last week delivered both price movement and exciting economic developments. The strong inverse correlation which dominated the USD and the S&P for much of 2009 continued to deteriorate. The S&P posted a second week of gains as the dollar index (DXY) remained virtually unchanged for the past two weeks.

Minutes from the Fed's January meeting released on Tuesday revealed an increased willingness from the Fed to withdraw emergency liquidity facilities it had put in place to combat the credit crisis. Initial market reaction to the report was muted both in equity and currency markets. However, on Thursday, after New York's market close, the Fed announced it was raising its discount rate (the rate it charges banks for emergency loans) by 25bps to 0.75%. Actions speak louder than words and the Fed's announcement sent the dollar spiking against its major counterparts.

A shot across the bow?
The Fed's announcement sparked a heated debate among market pundits. In the first camp were those who considered the move a serious warning for things to come, i.e. further tightening, imminent rate hikes. On the opposing camp were those who considered the move merely "technical" in nature and not a precursor for any rate hikes in the the near future. As always, the truth is probably a shade of gray somewhere in between. For the Fed, this was a perfect opportunity to make a small step toward normalization and, at the same time, test the market's reaction to the notion of monetary tightening.

Immediately following the Fed's announcement on Thursday afternoon, stocks receded in after-hour trading and the dollar spiked. By Friday's open, however, the market, in a vote of confidence, faded the news to close higher. In final judgment the news was taken as a positive: things are getting good enough to withdraw emergency measures and at the same time, loose monetary policy will remain in place to protect the fragile recovery.

USD - a Golden Cross
With little fanfare, dollar bulls marked a major milestone this week as the DXY's 50 day moving averge crossed over its 200 moving average. Dubbed by traders the "golden cross", the moving averages cross over is largely viewed as a confirmation of a strong uptrend. The DXY is still in consolidation territory, we can expect it to fluctuate around its current price and/or test support around 79.60-79.00. In the long run we should expect to see it trade higher.

S&P500 - Another swing at 1150?
As mentioned last week the S&P's uptrend is still intact. In fact, the stock market's reaction to a mixed bag of news and its reaction to the Fed's discount rate decision were quite bullish. Let's assume for a minute that the market's correction bottomed on Feb 05. This would be a decline of about 9% from the 1150 high, and about a 20% retracement of the move up from the March 09 lows. If this is the case we can expect to see the S&P to trend higher to re-test 1150. The weekly chart looks fairly bullish. It shows the recent correction only managed to pull the RSI to the 50 level but not below.

Euro - Downward Pressure Remains
The Greek saga did not dominate the headlines last week but make no mistake - the story is far from over and Greece is still a ticking debt bomb. The panic surrounding Greece might have eased a bit. However Greece is likely to return to the spotlight in the very near future as the country struggles to restructure its debt without explicit EU bailout. Tensions between Greece and EU leaders exposed the worrisome reality of convoluted European politics. Fears of contagion are also almost certain to take center stage if the situation in Greece continues to deteriorate.

British Pound 
While Greece and the Euro have taken center stage, the GBP's decline almost went unnoticed. UK's economy is plagued with so many ills we hear about daily: mounting public debt, debased currency thanks to a "generous" QE policy, contracting business lending, and political uncertainty. As a result, the pound was punished so severely, it even retreated against the beleaguered euro!

Introducing: Commitment of Traders Reports (COT)
I am so excited this week to start covering the COT reports. This is something I have been wanting to do for while. But finding the right graphical format of the reports was not easy. There are plenty of free sights that let you graph the COT reports but I could find none that let you graph the reports as a histogram. Finally, I decided to take matters into my own hands. I downloaded the COT reports from the CFTC's site and produced my own graphs.

What we will mainly be following is the net positions of the "non-commercials" who are the big speculators (aka "smart money") vs the net positions of the non-reportable who are the small traders, often referred to as dumb money. For the most part, we will ignore the "commercial" segment of the reports.

S&P 500 COT 
The S&P 500 e-mini futures COT report paints a bullish picture, supporting our initial analysis. It shows big investors are increasing long bets on the markets.

Dollar Index (DXY) COT
DXY Commitment of Traders report reveals long bias among big market speculators and retail players alike:

-forexRoy

Daily Recap - 02/18/2009

1. Despite a mixed bag of economic readings, the S&P managed to claw its way above 1100 to close at 1106. 
2. Unfortunately, it would seem like this "breakout" was doomed to fail - the Fed announced it will be raising its discount rate by 0.25% to 0.75%. This came as somewhat of a surprise and in after hour trading, stocks receded and, as expected, Financials were among the biggest losers. 
3. In my weekly review I wrote: "Any further comments from the Fed regarding its exit strategy should help maintain dollar strength, especially vs. the Euro and British pound" well - it happened and the dollar made fresh highs against the euro and the British pound (as well as other currencies)
4. At this point, we are likely to see further USD gains, especially against the weak euro and British pound.
5. It remains to be seen how the market will interpret the Fed's move. There is an unlikely scenario in which the move will be interpreted as a sign of strength - i.e. a Fed's vote of confidence in the recovery. However, at least in the short run, this move is much more likely to drag financials (and the broader market) lower as investors figure out the consequences.

-forexRoy

Mixed Economic Reports Hold S&P at Current Resistance

Thursday, Feb 18th, 11:30

Mixed economic readings -worst than expected unemployment report, better than expected Philly manufacturing index - kept the S&P looking for direction. While the market took the bad unemployment numbers in stride, it could not find the momentum it needed to hop above its 1100 resistance.

-forexRoy

Euro to Test SNB's Resolve

The SNB's message over the past months has been consistent - it will fight a stronger Swiss franc. But the market proved to be a mighty adversary for the SNB. Since the EURCHF broke the 1.5 level on 12/18/2009, the SNB attempts for intervention (see chart) were met with massive opposition.

As the EURCHF once again approaches "intervention territory", it remains to be seen whether the SNB will take another shot at intervention or if it finally decided that fighting a weaker euro is a lost cause.

The Chart below points out recent intervention attempts:
















-forexRoy