Don Vialoux: Increase in Volatility Between Now and October Seasonally Common

Friday, August 10th, 2012

by Don Vialoux, EquityClock.com

Upcoming US Events for Today:

1. Import/Export Prices for July will be released at 8:30am.
2. The Treasury Budget for July will be released at 2:00pm. The market expects -$71.0B versus -$129.4B previous.

Upcoming International Events for Today:

1. German CPI for July will be released at 2:00am EST. The market expects a year-over-year increase of 1.7%, consistent with the previous report.
2. Canadian Net Change in Employment for July will be released at 8:30am EST. The market expects an increase of 8,000 versus an increase of 7,300 previous. The unemployment rate is expected to remain unchanged at 7.2%.

Recap of Yesterday’s Economic Events:

The Markets
Equity markets ended flat on Thursday despite better than expected reports in the US pertaining to employment and international trade. Volume was once again deadly, amounting to the lowest four-day volume in 5 years. In an article posted by Zerohedge.com, the website notes that “the last 4 days have been the lowest volume for a non-Xmas holiday week since 2007 in futures and NYSE volumes are just remarkably bad compared to even normal cyclical seasonal dips.” Looking at the 4-day simple moving average of the S&P 500 ETF (SPY) volume, the last time the average was this low outside of a Christmas holiday week was October 2007, the last market high prior to the significant decline in the months and years to follow in 2008/2009. Volume confirms conviction, of which very little exists. Conviction to equities remains low as debate grows over the sustainability of the present rally that appears based solely on hope of further monetary stimulus from one of the major central banks around the world.

The divergence between price and volume can also be picked up on the NYSE Cumulative Advance-Decline Volume line, which is derived from the volume of advancing stocks less the volume of declining stocks. The NYSE recently managed to break firmly above the high of early July, yet the NYSE Cumulative Advance-Decline Volume Line has yet to accomplish the same. The pattern of this breadth indicator and price typically match each other, showing similar highs and lows, therefore this divergence just adds to the concern that conviction to equities is lacking, often a precursor to market declines should buyers fail to accumulate.

Sentiment on Thursday, according to the put-call ratio, ended bullish at 0.86. The apparent declining wedge pattern that can be derived from the ratio over the past three months is reaching a peak, which could imply a significant jump higher should the tendencies of this pattern be fulfilled. A significant move higher in the put-call ratio would likely be accompanied by an increase in volatility, a pattern that is seasonally common between now and October.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $12.37 (down 0.24%)
• Closing NAV/Unit: $12.39 (up 0.18%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

Copyright © Don Vialoux, EquityClock.com

Tags: Canadian, Canadian Market, Central Banks, Christmas Holiday, Conviction, CPI, Dips, Divergence, Don Vialoux, Economic Events, ETF, ETFs, Export Prices, Import Export, International Trade, Moving Average, Nyse, Stimulus, Trade Volume, Treasury Budget, Unemployment Rate, Volatility, Xmas Holiday
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HFT Algo Goes Totally Berserk And Serves Knight Capital With The Bill

Thursday, August 2nd, 2012

We all know something went horribly wrong in various NYSE-traded stocks today between 9:30 am and 10:15 am. So wrong in fact that the NYSE had to step in and cancel numerous trades in 6 symbols. However it did not DK millions of other trades in 134 other symbols, the vast majority of which we assume traded errantly due to the market making of Knight Capital (as admitted by the company), which today saw its biggest drop ever since going public on volume about 60 times greater than its average. We also all know that one should buy low and sell high. At least that is what human traders are taught, and that is what they attempt. Because if one consistently does the opposite, one will simply run out of money. Well, the opposite is precisely what the berserk algo in Knight’s Market Making group may have done if Nanex, which has done a forensic analysis of one of the trades in question, is correct. In other words, instead of at least attempting to provide liquidity via limit trades, Knight’s algorithm acted as a market order… gone horribly wrong. As the third chart below shows what the algo did with furious repetition and steadfast consistency was to buy at the offer, and sell at the bid, in other words buy high and sell low. Over and over and over and over. As Nanex laconically notes, “In the case of EXC, that means losing about 15 cents on every pair of trades. Do that 40 times a second, 2400 times a minute, and you now have a system that’s very efficient at burning money.” Which also means that by not DK’ing several hundred million prints, the NYSE may have just thrown Knight under the bus, because the market maker is suddenly on the hook for tens if not hundreds of millions in inverse market making profits.

Here we will assume that readers are sufficiently familiar with market structure to know that market makers only participate in the market in order to collect liquidity rebates, i.e., to be the limit on the bid which is hit, or the offer which is lifted. What Knight did was effectively the opposite, and it also collected the opposite of a rebate: i.e., it paid someone else for no reason at all… well technically to withdraw liquidity. However liquidity that led to creation of losses not profits.

Naturally, when the entire logic of trading was perverted courtesy of Knight’s busted algo, everything went Bizarro Day, and stocks went higher, because they went higher, and the higher they went, the greater the incentive for the algo to keep pushing the stock higher. This explains not only the volume surge, but also the shocking price moves in some stocks such as China Cord Blood which exploded several hundred percent higher before someone had to finally step in. And what is most notable is that because there were neither fat finger trades, nor busted algos that took out the entire bid or offer stack in one trade, thus triggering circuit breakers, but a slow methodical bleed, there was no reason under the current SEC order cancellation methodology to bail out Knight and its berserk algorithm.

Simply said: today may be the single worst day in Knight’s market making history. And sadly, as the NYSE already noted minutes before the market close, the decision to not cancel any more trades is “not subject to appeal.”

From Nanex:

What really happened, or how to lose a ton of money, fast.

What follows should strike you as crazy. If it doesn’t, read it again, because it is.

The following 3 charts plot non-ISO trades (regular trade condition) reported from NYSE in the stock of Exelon Corporation (symbol EXC). By plotting and connecting only regular trades from NYSE we get a clearer picture of the nature (some might say horror) of this event.

1. EXC One second interval chart. Circles are trades, the blue coloring is the NYSE bid and ask which is mostly covered by gray lines that connect the trades.

2. Zoom of above chart showing about 27 seconds of data. Now the gray lines connecting trades are more clearly visible. NYSE’s bid/ask is the blue shaded area (the bid price is the bottom of the shading, and the ask is the top).

3. Zooming in to a 1 millisecond interval chart, we can see one second of data which shows 39 trades.

Note how the trade executions ping pong from bid to ask. As if someone is buying at the offer, then 10 ms later selling at the bid, and so forth. It turns out, the gray shading you see in the first chart of EXC is from this alternating between buying and selling. That’s right, almost all these trades alternate between buying at the offer and selling at the bid, which means losing the difference in price. In the case of EXC, that means losing about 15 cents on every pair of trades. Do that 40 times a second, 2400 times a minute, and you now have a system that’s very efficient at burning money.

Tags: Algorithm, Chart Below Shows, Consistency, Exc, Forensic Analysis, Hook, Human Traders, Hundred Million, liquidity, Market Structure, Money, Nyse, Prints, Profits, Rebates, Repetition, S Market, Stocks, Tens, Trades
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A Brief History of Bond ETFs

Thursday, July 19th, 2012

by Matt Tucker, iShares

With the volume of headlinesthat bond ETFs capture these days, it’s easy to take for granted the fact that these innovative products haven’t been around that long.  In fact, it was ten years ago this month that iShares launched the first bond ETF (the iBoxx Investment Grade Corporate Bond ETF – LQD), along with three others.

At the time, there was certainly a business case for developing a new way to access fixed income. The over-the-counter (OTC) market – where traditional fixed income instruments trade – can be opaque, hard to navigate, and prone to unnecessarily high expenses (I’ve talked about this at length here on the blog).  Putting bonds into an ETF vehicle would give investors the best of both worlds: targeted bond exposure with exchange liquidity and transparency.

Although the idea clearly had merit, there were still some questions about how it would all work.  Was it possible to put the OTC fixed income market on the exchange?  How would liquidity be created for these products?  What would a hybrid bond-equity product look like?  Bonds had been listed on the NYSE and other exchanges for years, but had never garnered much interest from traders or investors.  Would an ETF suffer the same fate?

Over 500 funds and $290 billion in assets later, the global fixed income ETF market’s success speaks for itself.  So what were some of the key developments that brought us from those first four funds launched in 2002 to the plethora of bond ETFs available today?  As I see it, there were three main stages that accounted for the market’s exponential growth:

1. Creating a new market (2002-2006). In the first few years of fixed income ETFs, there were still only a handful of funds available, with slow and steady growth and usage by investors.  Since the building and launching of these funds required a re-thinking of the ETF structure itself, only one other provider outside of iShares was willing to take the bet.  By the end of 2006, there were still only six fixed income ETFs available with about $20 billion in assets.  However, we knew it was only a matter of time before the concept would catch on.
2. Additional providers enter the market (2007-2008). By 2007, there was a growing understanding that the “experiment” had in fact worked.  The steady growth and acceptance of the fixed income iShares line-up had proven that there was investor appetite for buying bonds on an exchange.  More importantly, investors were hungry for more.  When the SEC standardized the fund structure and listing process for FI ETFs, a flood of new funds entered the market.  By the end of 2008, the size of the market had almost tripled to $56 billion in assets, spread across 61 FI ETFs from eight providers.
3. The hunt for liquidity accelerates usage (2009-2012). During the financial market implosion at the end of 2008, trading volume in markets like corporate bonds fell by as much as 50%.  Why?  Liquidity in the bond market is supplied by broker/dealers, and since many of these firms were struggling to stay afloat, they pulled back from making markets in bonds.  Because of this, many investors discovered an alternative way to access bonds – through fixed income ETFs.  FI ETF trading volumes spiked, increasing 800 to 1000% for some funds.  And with increased volumes came increased asset flows and even broader investor usage.
   

Where does the fixed income ETF industry go from here?  We believe the market should continue to grow for several reasons.  First, changing demographics in the US and abroad are going to result in more and more investors seeking income-producing investments, and since ETFs provide an efficient way to access fixed income, they should benefit significantly.  Second, as global bond markets continue to evolve, increasing the investment opportunity set for investors, vehicles like ETFs that allow them to access challenging markets are likely going to be a vehicle of choice.  And finally, ETFs are still being discovered by many investors.  Despite all the growth of the past ten years, the ETF market is still tiny compared to the individual bond and mutual fund markets.

Given that ETFs are not just another way to buy fixed income, but are transforming the fixed income markets themselves, the sky is the limit for these game changing products.

Matt Tucker, CFA is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog.  You can find more of his posts here.

Bonds and bond funds will decrease in value as interest rates rise.

Tags: Best Of Both Worlds, Bonds, Brief History, Business Case, Corporate Bond, ETFs, Exponential Growth, First Few Years, Fixed Income Instruments, Fixed Income Market, Handful, Innovative Products, Ishares, Key Developments, liquidity, Lqd, Matt Tucker, Nyse, Otc Market, Plethora
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Don’t Overthink How Cheap Procter and Gamble is

Monday, July 2nd, 2012

Tags: Abbreviated Version, Anthony Abbate, Business Risk, Capital Hedge, Fiscal Years, Fund Location, Hanover Nh, Hedge Fund, Inelastic Demand, Intrinsic Value, Intrinsic Values, Nyse, Procter Amp Gamble, Procter And Gamble, Procter Gamble, Quality Companies, S Sales, Stock Price, Target Price, Valuation Analysis
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The Curious Case of the Deviant Dividends

Sunday, April 22nd, 2012

Pull up any ETF ticker on your favorite finance page and a wealth of information awaits you. Ever wonder about how accurate all of it is? If the answer is No, then today’s column is for you.

Most of the information is beyond dispute. The price is the price. But some values such as price-to-earnings and especially dividend yields really need to be scrutinized to avoid nasty surprises.

The other day on Bloomberg (the paid version), I came across several ETFs with incredibly rich dividends, with one – Guggenheim’s Solar ETF (TAN/NYSE) – outshining the others.

TAN holds about 30 solar energy companies. Its dividend yield is 9.2% according to Bloomberg and others. Indeed, its dividend of $2.11 (adjusted for a 1:10 reverse split) divided by its price of $23.02 works out to 9.2%. But is that likely for what should be a high growth sector?

In fact, looking deeper, only seven of the companies in the ETF, representing about 28% of the total allocation, have ever paid a dividend. Of those, two have postponed dividends for 2012 and another has cut its dividend by more than half. The weighted average yield on the seven is under 1%.

Since holdings can change every quarter I also checked holdings as of February 2011. The picture was the same: seven dividend-payers with an average yield of below 1%.

Where then did most of TAN’s dividend come from? The answer, according to the fund’s prospectus, is securities lending. Nearly 90% of TAN’s investment income for the 12 months ending last August came from lending about half its shares to short sellers.

You may recall that short sellers, expecting a stock to fall, sell shares that they have borrowed from other investors who are “long” (ie. They are invested in the shares). If the share price falls, short sellers buy it back at the lower price, return it to the lender and pocket a profit.

TAN, being an index ETF, is always long its shares. By lending, it earns interest from the short sellers and protects itself by demanding collateral, usually worth more than the value of shares loaned.

Generally, the ETFs with higher levels of lending income tend to be sector specific or they hold securities that are thinly traded or harder to borrow for other reasons.

Now you may say, a dollar is a dollar. However, a dollar from securities lending is not nearly as safe as a dollar from dividends. Few ETFs can earn so much from securities lending. It helps that TAN targets a very specific sector of the market. That likely means its holdings are harder and more expensive to borrow.

It could also be that the manager is lending to less credit-worthy short sellers or that the manager is accepting lower quality collateral. Either way, it does open the fund up to more risk than if it prohibited or restricted securities lending to a minimal amount. If a short seller is not able to return the borrowed stock, the fund manager will have only the collateral. In the normal course, that’s OK. But in a crisis, especially if the manager is holding poorer quality assets, the fund will suffer.

The other concern, especially for those seeking a steady stream of income, is that the income from lending will be much more volatile. TAN has fallen by 70% over the last two years and valuations on its holdings are beginning to look really cheap. At some point, that should see short sellers close their positions. Without that lending income, TAN’s yield will likely be closer to 1% than to 9.2%.

One last thought: There is no argument that securities lending is a completely legitimate activity within modern capital markets. But consider the optics: a fund manager enabling short sellers to pummel the very stocks held in the fund. For investors, the extra lending income helps fill the belly but taste like cardboard.

Besides dividends, there are other factors – price-to-earnings, use of derivatives and integrity to mandate being three – that must be examined carefully when selecting an ETF. It takes time and effort but as the example of dividends shows, this added scrutiny is a must for the serious investor.

****

The archerETF Global Tactical Portfolio

archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

Please call us at TF 1-866-469-7990 for more information.

Tags: Bloomberg, Curious Case, Dividend Payers, Dividend Yield, Dividend Yields, Earnings, ETFs, Growth Sector, Guggenheim, Investment Income, Investors, Nasty Surprises, Nyse, Prospectus, Reverse Split, Rich Dividends, Share Price, Short Sellers, Solar Energy Companies
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Dow Jones – Hi or Lo?

Wednesday, February 29th, 2012

This Week: SPDR DJIA TRUST Ticker: DIA / NYSE

The Dow Jones Industrial Average just touched the 13,000 level this week after nearly four years. Where to from here? Well, the mountain is high. The valley is low. We think it will climb, but not without woe.

The biggest woe is Greece. The indebted nation agreed a $170 billion rescue plan, but will only get the money if its government fires workers, slashes pensions and wages, and raises taxes, all by month’s end. Greeks are rioting and opposition leaders are threatening reversal.

Private holders of Greek bonds are being squeezed too: for every 2 bonds they hold, they’ll be offered a new one that is longer-dated and lower-yielding. If enough holders refuse the offer, Greece could default. There will be more on this by March. Until then, global equity markets will remain nervous.

A European recession would be woe #2. For all their sanctimonious lecturing, France and especially Germany profited from exports to their spendthrift, Euro-neighbors. But two years of fiscal clampdown have hurt economic growth. Now further austerity threatens to push it into recession.

The austerity hurt Chinese exports. And growth within China was dampened by central bank efforts to tame inflation and speculation, especially in housing (nothing we’d know about in Toronto). Slower growth in China will have a knock-on effect, especially on us hewers and diggers, but more broadly too.

Short-term technicals are also bearish. After climbing for five straight months, the Dow is showing signs of fatigue. Our proprietary indicator suggests a pull-back of about 5% in the next few weeks.  Also, since the start of February, the DJ Industrials has been climbing alone. The DJ Transportation Index, more closely tied to economic fundamentals, has lagged by 5.6%. Not a good sign.

This list of woes suggests a short-term correction for markets. Let’s get to the positives. What will take us higher on the Dow after the correction? Three things: stocks are cheap, bond yields are thin and the economy is improving.

Quality stocks are cheap by several measures. The Dow is trading at 13.3 times its earnings, near the bottom of its long-term range, as prices have lagged earnings growth. The Dow’s earnings-per-share is up 134% from the March 2009 lows, while the Dow’s price is up 70%. True, earnings growth has plateaued in the last two quarters, but that still leaves a large gap.

In the same period, corporations have drastically cut debt levels, bringing it to par with equity and the lowest level in over a decade. Little debt, lots of profit…it’s no wonder dividend yields have risen to 2.5% and are expected to rise further. Compare that to a yield of 3.2% on a similar quality 10-year bond.

From the technicals, looking past the next few weeks and out to the next few quarters, the view is positive too. Though not quite there yet, our proprietary indicator is near a Buy levels not seen since March 2009. A correction in the short term would put it firmly in the Buy camp. And while the recent new year rally has been on relatively light volumes, we expect low valuations and good dividend yields will lure investors back in.

Finally, the economy: It’s improving. Manufacturing and services have continued to gain. Unemployment is down, with initial jobless claims falling to the lowest level in four years. Consumption is rising again. Housing prices have bottomed.  The yield spread – the difference between long and short term interest rates – remains healthy at about +1.9 percentage points. Over many decades, this spread has proved an excellent recession forecaster, besting all economists. When it turns negative – that is, when the rate on a 3 month loan is higher than on a 10 year – watch out.

There are a couple of Exchange-Traded Funds to consider for the Dow Jones Industrial Average. The first is the SPDR DJIA ETF (DIA/NYSE), traded in U.S. dollars in New York. The second is the BMO DJIA Hedged to C$ ETF (ZDJ/TSX). Both are plain vanilla and hold all the 30 shares of the Index. For Canadian investors, with ZDJ you avoid a currency trade and you’re returns will mimic those received by a U.S. investor, regardless of how the U.S. dollar does against the Loonie.

The archerETF Global Tactical Portfolio

archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

Please call us at TF 1-866-469-7990 for more information.

Tags: Austerity, Bond Yields, Canadian, Canadian Market, Chinese Exports, Clampdown, Dj Industrials, DJIA, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Fundamentals, Global Equity Markets, Greek Bonds, Nyse, Opposition Leaders, Private Holders, Signs Of Fatigue, Slashes, Spendthrift, Tame Inflation, Technicals, Transportation Index
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Jim Grant On Gold-Backed Bonds And ‘The Hope Leeches’

Wednesday, February 15th, 2012

James Grant, of Grant’s Interest Rate Observer makes some thought-provoking statements in his must-listen Bloomberg Radio interview with Tom Keene today. While noting America’s exceptionalism (h/t Clint Eastwood?), he perhaps doesn’t mean all Americans as he takes the Fed and Treasury to task over their actions in recent years (and in fact for decades). His long-held view that rates should be higher and follow generational cycles raises concerns for him that government intervention is in fact ‘prolonging the symptoms’ of the recession. In considering Tom Keene’s well-thought-out question of why the US does not take advantage of low rates and issue exceptionally long-dated bonds, Grant agrees with the odd premise that they do not but then goes on to what would be sounder policy.

“Why not issue bonds backed by gold bullion? Gold is a better money and is grounded in something besides the power of the people that print the dollar bills.” The interview goes on to discuss population growth as a more potent ‘fix’ for housing in the US than QE, that the US is a preferable investment environment (given valuations) than Germany or Japan, the drastic drop in NYSE volumes, and the “leeching out of excitement, hope, and expectation of improvement (particularly for the young).” His compare and contrast of the 1920-21 depression to the current Great Recession (which seems not to end), focused on the fiscal and monetary actions, is an eye opener that its just possible the present-day orthodoxy is wrong. Urging that we maintain our sense of shock at the size of our ‘peacetime’ deficits, Grant worries that we are in a secular stagnation.

Click below to listen to the interview…

Jim Grant On Bloomberg Radio by user5452365

Tags: Bullion Gold, Compare And Contrast, Dollar Bills, Drastic Drop, Exceptionalism, Eye Opener, Generational Cycles, Gold Bullion, Government Intervention, Interest Rate Observer, Investment Environment, Issue Bonds, James Grant, Jim Grant, Leeches, Nyse, Peacetime, Population Growth, Radio Interview, Tom Keene
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Raymond James’ Top Canadian Stock Picks for 2012

Saturday, January 14th, 2012

Raymond James Ltd.’s best [Canadian] stock picks for 2012 are:

• Alamos Gold Inc. (AGI-TSX)
• Bird Construction Inc. (BDT-TSX)
• Domtar (UFS-NYSE | UFS-TSX)
• Eldorado Gold Corp. (EGO-NYSE | ELD-TSX)
• Fortress Paper (FTP-TSX)
• Legacy Oil & Gas Inc. (LEG-TSX)
• Lumina Copper Corp. (LCC-TSXV)
• Methanex (MEOH-NASDAQ | MX-TSX)
• Secure Energy Services Inc. (SES-TSX)
• Shoppers Drug Mart (SC-TSX)

To view the whole document, you’ll have to come to the site – use the fullscreen option for the larger read:

BestPicks2012_132205

Tags: Alamos Gold, Bdt, Bird Construction Inc, Canadian Stock, Domtar, Eld, Eldorado Gold Corp, Energy Services Inc, Gold Inc, Lcc, Lumina, Meoh, Methanex, Nasdaq, Nyse, Raymond James, Secure Energy, Shoppers Drug Mart, Tsxv, Ufs
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The January Barometer (Saut)

Thursday, January 12th, 2012

The January Barometer

by Jeffrey Saut, Chief Investment Strategist, Raymond James

January 9, 2012

It’s that time of year again when the media is abuzz with that old stock market saying, “so goes the first week of the new year, so goes the month and so goes the year.” Admittedly, the January Barometer has a pretty good track record. To wit, according to the Stock Trader’s Almanac (as paraphrased by me):

Devised by Yale Hirsch in 1972, our January Barometer states that as the S&P 500 goes in January, so goes the year. The indicator has registered only seven major errors since 1950 for an 88.5% accuracy ratio. . . . Including the seven flat-year (minor) errors (less than +/- 5%) yields a 77.0% accuracy ratio.

The Hirsch organization also notes:

The last 38 up First Five Days (of the new year) were followed by full-year gains 33 times for an 86.8% accuracy ratio and a 13.9% average gain in all 38 years. … Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction.

Now given that historically the equity markets have a bullish tilt 67% of the time, the first week of the new year typically gives the January Barometer a bullish start for the month. This year is no exception with the first four sessions of the year lifting the S&P 500 (SPX/1277.81) 20.21 points, or 1.61%. However, 1.55% of last week’s rally occurred on Tuesday when the SPX vaulted 19.46 points. Subsequently, as stated in that morning’s verbal strategy comments:

“That said, the NYSE McClellan Oscillator is short-term overbought and the stock market’s internal energy has not yet been fully recharged. Accordingly, it would not surprise me to see a pullback. … Consequently, I would not chase the dragon right here since I anticipate an upside-blow off is due.”

To be sure, Tuesday’s Triumph certainly felt like an upside blow-off with the D-J Industrials (INDU/12359.92) tagging 12479.65 intraday before surrendering 83 of those points into the closing bell. That action left the senior index struggling for the balance of the week as it closed roughly 120 points below Tuesday’s session high. Still, the first week of the new year was “up,” causing one Wall Street wag to chant, “so goes the first week of the new year, so goes the month and so goes the year.” Yet, there is one indicator that I give more credence than the January Barometer.

Back in the early 1970s, when I was working on Wall Street, I encountered a man who became my friend and one of my mentors. At that time Lucien Hooper, then in his 70s, was considered one of the savviest “players” in this business, as well as the second longest contributing editor to Forbes magazine. While known for many market axioms and insights, the one that stuck with me the most was Lucien’s December Low Indicator. It seems as if only yesterday we were sitting at Harry’s at the Amex having lunch when he explained it. “Jeff,” he began, “Forget all the noise you hear about the January Barometer. That being, ‘so goes the first week of the new year, so goes the month and so goes the year.’ Institutions can manipulate prices for a short period of time, especially during a holiday-shortened week with a limited audience. Consequently, pay much more attention to the December low. That would be the lowest closing price for the INDU during the month of December. If that low is violated during the first quarter of the New Year, watch out!”

For the record, the Dow’s closing low in December was 11766.26, recorded on 12/19/11. “Circle” that low and watch it closely during the first quarter of 2012. If the Industrials travel below that low then respect Lucien’s “watch out” warning, for it has proven prescient since in all but two instances since 1952 when the December low was violated during the first quarter the Dow slid another 11% on average. Importantly, if the December low is not breached in the 1Q, heed the January Barometer since when taken in conjunction with the December Low Indicator it has been right nearly 100% of the time.

So, other than the first week of the January Barometer, what else happened last week? Well beginning with the technicals, both the INDU and the D-J Transports made new closing reaction “highs.” There was a “Golden Cross” when the Dow’s 50-day moving average (DMA) crossed above the Dow’s 200-DMA. And, that action broke the Dow above what a technical analyst would term the “neckline” of a bullish reverse head-and-shoulders chart pattern. Moreover, Last Tuesday’s upside gap in the S&P 500’s futures chart was “closed” on Thursday (read: bullish) as participants continued to buy the dips. Nevertheless, I am sticking with my short-term cautionary “call” because the stock market is still overbought in the near-term and a lot of internal energy has been used up in the ~10% rally that began around Thanksgiving. Additionally, there was every reason for stocks to rally on Friday’s positive jobs report, but instead there was little reaction.

As for the week’s fundamentals, of the 16 economic reports 10 beat expectation, five were below estimates, and one was in line. Plainly, the employment numbers improved and the ISM Manufacturing report rose to its highest level since June. China’s Manufacturing PMI rose while its PMI Services Index jumped above 50, German unemployment fell, Euro zone’s CPI moderated, and the Euro basis swap eased. On the negative side, our ISM Services report was below estimates, refi applications declined by 2.5% with purchases down 9.6% despite lower mortgage rates, December retail sales were a touch “light,” and UniCredit (one of Italy’s largest financial institutions) stock collapsed 38.6%, heightening fears about Euroquake.

Speaking of share price collapses, Acme Packet’s (APKT/$26.58/Strong Buy) stock has collapsed from last May’s high of $84.50 into last week’s $25.20 intraday low punctuated by a disappointing earnings preannouncement. Our fundamental analyst (Todd Koffman) has been negative on APKT since initiating research coverage on May 23, 2011. On last week’s announcement the shares gapped lower, causing Todd to raise his rating to a Strong Buy with these comments:

“We are upgrading Acme Packet to Strong Buy from Underperform. Our upgrade is based on our view that wireline VoIP (voice over the internet) is in the early innings and wireless VoIP has yet to start. While the company has had a number of missteps, we believe incumbent telcos are transitioning from circuit switched voice to native voice over IP. The U.S. is leading the charge. Line data is difficult to come by, but our estimates suggest less than 10 million of the 60 million business phone lines (U.S. only) have converted from legacy circuit switched voice to native voice over IP. We note, international markets are even further behind. Recent missteps reflect exaggerated expectations complicated by unusual buying patterns. We believe these potholes will temper management expectations and provide a realistic base for future growth. Further, we expect Verizon (VZ/$38.33/Market Perform) and AT&T (T/$29.68/Market Perform) to deploy wireless VoIP using Acme session border control capacity in late 2012.”

For further information, see our January 5, 2012 upgrade report on APKT.

The call for this week: It’s pretty amazing that the equity markets have rallied in light of the super strong U.S. dollar. That action suggests that stocks are not quite ready for the pullback I have been expecting following last Tuesday’s upside blow off. Still, while the Dow Industrials and Dow Transports have tagged new reaction highs, the SPX and NDX have not. Such divergences always leave me in a cautious mode, especially since we are past the seasonally sweet spot for stocks. At some point we are going to get a profit-taking event, whether it is from last Tuesday’s intraday high (1284.62 SPX) or the 1300 – 1320 overhead resistance zone remains to be seen. Until that pullback occurs there just isn’t a whole lot to do on a trading basis.

Copyright © Raymond James

Tags: Barometer, Bear Market, Chief Investment Strategist, Days Of The New, Hirsch Organization, Industrials, Internal Energy, Intraday, jeffrey saut, Mcclellan Oscillator, New Year, Nyse, Pullback, Raymond James, Spx, Stock Market, Stock Trader, Tilt, Time Of Year, Yale Hirsch
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Short Selling Rises Most Since 2006 in September – Just Ahead of Rip Roaring Rally of October

Monday, October 10th, 2011

It almost never fails does it?  Just as investors position themselves for zig…. instead zag happens.  Apparently we just saw the largest increase of short selling since 2006 in September – which worked out nicely for about 1.75 days in October, before this face ripping rally of 10%.  One can be sure part of this move upward is those newly placed shorts covering – indeed we saw such a vicious move last Tuesday in the closing 45 minutes, I have to assume many of those positions were harpooned that day.

• Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities.  Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006..
• Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show.
• Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market.

• “The Lehman collapse is way too clear in people’s minds,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “They don’t want to get burned as much again. They know either they get some protection or get out altogether.”
• About 4.1 percent of NYSE shares have been borrowed and sold, up from 3.5 percent at the end of July, data from the bourse shows. U.S. short sales are rising at the second-fastest pace on record after the 2008 financial crisis, according to exchange data dating back to 1995.
• Short selling, where traders borrow shares and sell them, hoping for a decline, is increasing even as equities approach the cheapest valuations on record. The MSCI All-Country World trades at 11.8 times reported profit, compared with 11.9 in the five months after Lehman’s collapse. The measure’s average price-earnings ratio since 1995 is 21, data tracked by Bloomberg show.
• The bond market indicator that has predicted every U.S. recession since 1970 now shows that the economy has a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Fed’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research.

And the last time this happened?

• Bearish bets last increased faster in March 2009, the same month the S&P 500 began a bull market that doubled its value.

Tags: Bear Market, Bets, Bourse, Collapse, Copenhagen, Decline, Exchange Data, Financial Crisis, Indexes, Last Tuesday, Least Five Years, Lehman, Msci, Nordea Bank, Nordea Bank Ab, Nyse, Short Sellers, Strategist, Trillion, Valuations
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