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How Watching Market Psychology Can Help You Time the Market

Elliott wave patterns in price charts reflect the struggle between the bulls and bears
By Elliott Wave International

 

Two economic reports hit the newswires Thursday morning (March 6). Both were important, yet each one had the opposite implication for the trend. The market chose one report over the other, and the question is, why — and what can we learn from that? Read more.

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Reality Check–Historic Divergences

What drives share prices?

Academia and indeed the investment industry per se would have you believe that it’s company earnings or as more often phrased “earnings per share (eps),” despite ample evidence to the contrary that there are periods of time when price goes up as earnings fall and vice-versa.

A technical analyst, who studies chart patterns and uses a tool-box of indicators for guidance, will ignore “eps,” as they can be easily manipulated or distorted, either by way of accountancy shenanigans or via the recent “flavour of the time, share buy-backs.” The following monthly-data chart of the S&P 500 index, America’s finest, includes a blue-line 200 period moving average, a way of smoothing out the return and a line that has offered pretty good “support” to price over the past 16-years. Note however, that IF price moves too far above the blue-line, price has snapped back as during the 2000-2003 and 2007-2009 periods:

24 August 2016 1

The lower green-line is a momentum measure, in this case a rolling 12-month rate of change indicator (ROC.) Again kindly note that, as in 2003, the post 2007/09 financial crash saw the ROC accelerate for just over a year, since when there has been a major divergence, stocks higher whilst the momentum is grinding lower (see red arrow.) Hence, the gap above the 200 blue-line and the green-line divergence are flashing warnings of a major stock-market top approaching.

A Socionomist, who studies collective social mood by way of a nation’s main stock-index, observes that there are periods in history, usually three-generational, when optimism (or complacency) is so high that the “crowd” turn mad, blindly following each others wisdom that, “it’s different this time,” to justify matters such as divergences and other technical observations.

A second chart below shows the same S&P 500 stock-index, compared this time with reported year-on-year earnings per share:

24 August 2016

Here, as stated earlier you can see that stocks have risen during periods of rising and falling EPS so we can kick the academics theory into the long-grass. You may note also, the periodic “major divergences” between the two variables, particularly towards the 2000 and 2007 market tops and also observe that they were trifling when compared to the current market divergence.

This Socionomist and technical analyst observes that based on both charts presented, the divergences are of historic proportion and indeed supports another recent observation in respect of another asset-class, as outlined within, “The Madness of Crowds.”

The warnings are there but only if you can see past the crowd.

Investment Markets Overview — W/E 19th August 2016

Shadow Banking….“refers to the financial intermediaries involved in facilitating the creation of credit across the global financial system but whose members are not subject to banking regulatory oversight,” such as finance companies, credit insurance providers, money-market and exchange-traded funds, private equity firms and hedge funds. The list is growing and actually includes many of the largest banking organisations who prefer to place part of their activities outside of the regulated channel (for obvious reasons) plus it’s far more profitable for them. Aside of it making a joke of the so-called “prudentially-regulated banking system,” for example much of the mortgage-backed securitisation that allegedly caused the 2007 financial crisis was completed via the shadow banking sector, it has grown to such an extent now that it poses a very serious risk to the global financial system itself, estimated to have grown from $47,000,000,000,000 post the 2007 “problems” to well North of $100 Trillion today. According to the euphemistically called “Financial Stability Board,” a regulatory task force for the G20 economies set-up in 2011 and headed-up by “Chancer Carney,” shadow banking makes up 25% to 30% of the total financial system and one has to wonder just how accurate that figure is when it’s outside of regulated activity. Either way, aside of operating within the perceived global tax-havens, shadow banking operates across the financial sectors of America, Europe and China, the latter on which is expanded on below:

19 Aug 16 .

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

  Returning to the “Shadow Banking” concerns, they do not have banking licences so do not take deposits as a depository bank would, instead they ……

Charts:
1.  Indices Weekly
2. US New Home Starts V US Housebuilder Sentiment
3. UK CPI V UK  Imported Food Prices
4. Japan GDP V  Japan Exports
5. Commodities Weekly

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“A chain is only as strong as its weakest link”

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Lipstick on PIIGS

Lipstick on a pig” is an expression conveying a message that making superficial or cosmetic changes is a futile attempt to disguise the true nature of a product.

18 August 2016

There have been many claims as to who first used the term but regardless, a fitting example is the TV advertisement of early 2002 when brokerage firm Charles Schwab, attempting to expose certain competitor Wall Street firms’ conflicts of interest, showed an unidentified sales manager telling his salesmen, “Let’s put some lipstick on this pig!

That bastion of market integrity, the European Central Bank, has been doing the same thing for a few years now in respect of the PIIGS, the acronym introduced during the financial crisis for Portugal, Italy, Ireland, Greece and Spain, the southern European economies whose main common denominator was exposed as unsustainable debt level, debt that had accumulated after decades of bad investments, lax controls and accounting fraud.

€Billions of tax-payer funded loans have been poured into these economies by the ECB directly and via the IMF and a rafter of further European acronyms’, such as the European Financial Stabilisation Mechanism (EFSM), and the European Financial Stability Facility (EFSF) plus the ECB’s latest wheeze, Outright Monetary Transactions (OMT.)

But all that this additional debt has achieved is to delay the day of reckoning and guarantee that the inevitable bursting of the debt bubble will be far worse than if they had let nature take its course six-years ago.

Within our weekly “Investment Markets Overview” comment was made recently in respect of Italy’s non-performing loans and its public debt, now running at a respective 20% and 130% of the country’s GDP, yet 10-year Italian bond yields offer just a little over 1% pa.

This may be about to change, however, as the interest-rate cycle appears to be on the turn. As an example we show the 10-year yield for Portugal’s sovereign debt, a “pig” that also has 130% public debt to GDP but which, when added to Portuguese personal debt, jumps to 380% of GDP:

18 August 2016 2

After the yield –spike to 16% in 2012, the 10-year collapsed to 1.68% as of late March 2015, since when it has nearly doubled to 2.95% despite the ECB’s ongoing delusion that they control the rate.

A simple over-lay of a Fibonacci re-tracement tool shows the typical 38.2% – 61.8% target-zone for where yields may be heading, which are at 7% to 10.3%, high enough for things to get very ugly for creditors and indeed for the “PIIGS” themselves, despite the smattering of lipstick administered.

Pig photo courtesy of blogs.plos.org

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Markets Overview — W/E 12th August 2016

GDP….”a monetary value of all finished goods and services within a Nation or region,” and better known as “economic growth,” are recorded on a quarterly basis and provide a snap-shot of how well, or otherwise, a nation or region is progressing. Unfortunately over the past few years, just about every Nation on the planet is recording a trend of lower economic growth rates. Hot on the heels of the latest tepid numbers from the US and the UK, at a respective rate of 1.2% and 2.2% annualised, this week saw the latest for the Euro-Zone, which was stated at an unchanged 1.6%, whilst last week’s overview expanded on the world’s 2nd largest economy, China, and in particular its debt and GDP inter-relationship. Next week will see the latest from Japan, the world’s 3rd largest economy, which is also likely to disappoint and whilst this column has been at pains to point out the cause of the now rapidly slowing world, unsustainable debt levels, it has also predicted that the policy response to it, of even more debt among other futile measures, would only compound the problem and turn a painful but relatively brief recession, defined as two consecutive quarters of negative GDP, into a more protractive period beginning with “D.” Policy-makers appear to be in denial in respect of the result of their collective efforts and perhaps none more so than Ex European Commissioner and former Italian Prime Minister, Mario Monti, who in a Bloomberg interview this week suggested that Italy’s banking problems are being exaggerated. This is expanded on below.

12 Aug 16 .

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

  So, coincidentally in a week that confirmed Italy’s Q2 GDP had stalled to 0% against the 0.2% forecast, Mario Monti actually recognised ……

Charts:
1.  Indices Weekly
2. US Retail Sales M on M V US Retail Sales Y on Y
3. E-Z GDP V Italy GDP
4. China Imports V  China Exports
5. Commodities Weekly

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“Complacency, a feeling of security, often while unaware of some potential danger.

Click Here to view Details of the full version of this Newsletter which includes full text and detailed

 

Investment Markets Overview — W/E 5th August 2016

Stimulus…..”a thing that arouses activity or energy in someone or something; a spur or incentive,” at least that is according to the Oxford Dictionary, and it’s what the world’s central banks’ have been doing for years now, alas with less and less arousal. Fresh on the heals of Japan’s $US273BN stimulus package announced last week, notably its 26th since Japan’s economic implosion commenced in 1990, all of which has failed miserably to stimulate either inflation and/or economic growth, their stated goals, the Bank of England’s MPC, headed by “Charmer Carney,” unveiled near “panic” measures this week despite 8-years of similar stimulus with little effect. After 7-years at 0.5%, the base-rate was cut in half, to 0.25%, with an additional £60BN pm of QE, oops “asset purchase target,” over the next six-months, plus for good measure a £10BN planned purchase of corporate debt and a £100BN loan program for the banks. The now “constant Central Bank intervention,” aside of increasing market volatility and economic over-capacity, have “pulled back the curtain,” on just how impotent they and their policies have become, which is expanded on further towards the end of this overview.

The financial markets had a very interesting and revealing week, particularly US Treasuries, the glue that’s holding the whole global debt load aloft. We have further comment on this and much more below:

5 Aug 16 .

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

  Aside of ample evidence of “policy failure” following years of monetary stimulus, negative inflation and debt- to-GDP levels exceeding 250% ……

Charts:
1.  Indices Weekly
2. $US Index V US Trade Deficit
3. UK Shop Price Index V UK  Services CPI
4. RBA Cash Rate V  OZ Retail Sales
5. Commodities Weekly

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“Impotency in men can be cured by Viagra, allegedly, but what to give Janet?”.

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UK Interest Rates and the Danger of Crowds, Socionomically

It’s been dubbed as “Super Thursday,” the day that “Charmer Carney” and his fellow “market manipulators” at the Bank of England monetary policy committee are set to cut UK interest rates.

At least it appears to be a “slam dunk” according to 45 of the 47 economists that Bloomberg surveyed days ago, with the majority of them expecting a 25 basis-point reduction to 0.25% and possible other measures such as more QE or a lengthening of the time taken to return inflation to the 2% target.

Furthermore, a separate Bloomberg report shows that Hedge funds and other large speculators have the most bearish bets against the pound since records began in 1992.

On both fronts, a Socionomist would observe these as “sentiment extremes,” with everyone on one side of the boat!

Here are a couple of observations and thoughts:

 Throughout numerous postings I have made the point that Central Bankers, including the Bank of England, have never made a pro-active decision in their collective lives, they re-act to market rates, the rate set by you and I and anyone else out there who has a decision to make on either lending or borrowing £Sterling and/or looking to make a currency exchange transaction.

Exhibit 1:

3 August 2016

As can be observed above, whilst the base-rate has held at 0.5% since 2009, the 3-month £GBP money-market rate and the 2-year interest rate have “waxed and waned,” dependent of the market perception and have both “bottomed,” in the case of the 2-year back in 2012 since when the rate has risen by 150%. Furthermore, the “inflation rate,” is turning higher, albeit that it is still far from the 2% pa target that the Bank of England has missed for most of the past decade.

As for the British pound “bearish extreme” consensus:

Exhibit 2:

3 August 2016 2

Here is shown the £/$US exchange rate, monthly data points which show a high of 2.1 back in 2007 and the 1.28 post-brexit low of late June 2016. The trend-channel highlights where the British Pound has spent most of it’s time over the past nine-years, and for sure it has been super-weak since the secondary high of 2014.

 

If anything, in the very short-term, which these surveys relate to, I would expect a bounce towards the 1.40 level, the bottom of the channel, rather than further weakening, as the herd are expecting.

So there we have it, crowds are usually wrong when it comes to financial forecasting, but of course when itcomes to the Central Bank, politics are involved, regardless of its purported “independence.”

 
We’ll find out tomorrow!

 

 

 

 

 

 

 

 

Investment Markets Overview — W/E 29th July 2016

The “unacceptable face of capitalism,” was a term accorded in 1973 to “Tiny Rowland,” the flamboyant boss of mining conglomerate Lonro, by the then UK Prime Minister Edward Heath. Rowland was accused of making decisions without consulting the board, dismissing non-executive directors as “Christmas tree decorations,” whereas it was more to do with Rowland breaching British-led UN sanctions against Rhodesia, imposed after its PM Ian Smith had declared an “un-official” independence from the UK. The term re-emerged this week within scathing reports into the collapse of the 88 year-old high street retail chain BHS, by the UK Parliamentary “business” and “work and pensions” committees, aimed at BHS former boss, Sir Philip Green. There have been acres of news print covering this story so there is not much point in repetition, but it is rather ironic that during the same week the UK’s newly installed Premier, Teresa May, decided to “freeze/delay” any final decision on the largest tax-payer funded project in British history, the Hinckley Point power plant, allegedly without any consultation with her board, better know as the cabinet or UK Government.

The financial markets had much to contend with this week, including monetary policy meetings at the Fed and the bank of Japan. We have further comment on these and much more below:

29 July 2016 WE

 

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

   It was the turn of the Democrats to anoint Hillary Clinton as their Presidential nominee this week and they did so with gusto, as speaker after speaker ……

Charts:
1.  Indices Weekly
2. US Non-Revolving Credit V US GDP
3. E-Z  Unemployment V E-Z  & EU27 Consumer Conf
4. Japan Trade Balance V  Japan Imports & Exports
5. Commodities Weekly

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“It is hard to be shocked by the moral depravity of some of our leaders, but.

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