Tuesday the Fed came out and said that they will not be expanding their quantitative easing operations.  They claim that things are looking good enough that they do not need to do more.  Of course we also had a really bad GDP number and long term rates have been climbing ever since the original announcement.  If the Fed is right and things are improving then we can expect to see some fairly strong inflation coming up in the next few months out to about two years.  Essentially at some point relatively soon we are going to be in a very inflationary environment.  Here are two sectors that we think will benefit from inflation, and will likely do well even if inflation is relatively flat.

MOO-Agribusiness ETF

OIH-Oil Service HOLDR

Happy Trading,

Dave@TheMacroTrader.com

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One of the best indicators to see how the global economy is doing is to just look at the CRB index.  While we don’t expect it to be hitting new highs anytime soon, it would be nice to see it moving up at least a little.  Instead as you can see in the chart below it has only managed to find some type of bottom.  If it’s “The Bottom” or just “A Bottom” is besides the point for now.  It is enough to see that it is not trending up.

CRB Index

Another good indicator to look at to gauge the strength of the global economy is that of the Baltic Dry Index.  Over the last couple of weeks we have seen many blogs and other market commentators mention that the index has been climbing.  Of course what they fail to mention is that if you look at the longer term chart of the index, it is still down significantly and it makes the recent rally look insignificant.

Baltic Dry Index-Short Term

Baltic Dry Index-Long Term

Needless to say we think that many commentators are getting ahead of themselves in saying that the economy has bottomed.  In fact the vast majority of the economic indicators that we follow are still pointing straight down, without any “green shoots” characteristics.  Until we can get some  historically reliable indicators pointing to a bottom and/or a rebound we will be cautious as capital preservation is our first priority.

Happy Trading,

Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

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Today’s post is short but as they say a picture is worth a thousand words, and sometimes even more.  In our subscriber area we have a detailed analysis of the consumer and consumer related stocks.  For everyone else, here is the chart of the consumer discretionary ETF and you are welcome to draw your own conclusions.

XLY-Consumer Discretionary ETF

Happy Trading,

Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

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Following up yesterdays post regarding what we see happening in the crude oil market we were happy to see the inventory numbers come out this morning and once again confirm what we have been seeing, namely that until Contango narrow significantly or goes away entirely there will be a large incentive for large energy traders to buy oil in the cash market and sell a forward contract to lock in a gain.

With Contango at 10% from the current month out to August there is a huge incentive for large speculators like global macro and energy funds as well as oil companies that have extra storage capacity to put this trade on and just sit on the oil until it has to be delivered.

Here is a chart of oil inventory data and as you can see we are at highs not seen since 1990.

Weekly US Crude Inventory

Happy Trading,

Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

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In our subscriber letter this week one of the topics that we discussed was the production destruction as seen in the rig count data provided by BHI-Baker Hughes. They provide weekly oil rig data for the United States and Canada and Monthly numbers for international data.

So what do the numbers show? Well in the United States and Canada the rig count has come down 57% from the highs seen in 9/1/08.  This has taken the rig count back to the levels seen in 2002.

US and Canada Rig Count

Internationally the situation is not quite as bad, but it is still bad.  Rig counts worldwide have dropped off 35% and we are back to levels not seen since 2004.

International Rig Count Data

After looking at these charts it would seem logical to say that oil is going up as production levels are down so much.  Long term this is probably right but in the short and even medium term there are a few major issues that have to be dealt with before oil can have another large bull run.

The main problem is what is referred to as the output gap.  The output gap basically says that there is a gap between what we are producing and what we are able to produce.  While a small gap almost always is existent right now it is very large.  Until the economy actually starts to pick up some steam this gap will remain wide.  As the economy produces less and less the need for commodities continues to decline.

This drop in demand for commodities has started to slow but it is still dropping.  As we showed a few days ago in our post on port data, world shipping data and therefore world trade has dropped off a cliff.

LA and Long Beach Port Data

Until indicators like the Baltic Dry Index and port data start to turn up, oil and other commodities will have a hard time climbing back anywhere near $100 a barrel let alone the $150 we saw almost a year ago.

Another thing that continues to put pressure on oil is the extreme contango that we have seen this year.  Contango in the futures market is when the near month contract is selling at a discount to the farther out contracts.

While a bit of contango is not unusal we have had some extreme readings this year.  In fact at one point you could have bought oil in the cash market and by selling the contract six months out you would have locked in a 25% return minus the storage costs.

Over the past few months however the spread has narrowed but is still high enough to cause speculators to build up supply until it is time to deliver.  Right now contango is at 10% from the June to September.  This means that you could be buying oil now and lock in a 10% return.  Until the premium is brought down closer to storage costs there will be a lot of artificial demand which depresses prices and makes it hard for oil to go up in a big way.

4-Month Contango Curve

So until demand picks up and contango comes down we will likely not see a large sustained move up in oil.  That being said there are and will be many trading opportunities to the long and short side, but we feel as though a long term bull move is still a ways off.

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

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Over on the Calculated Risk blog we saw today how they were talking about the rebound in port data using Los Angeles port data. Since we track the LA and Long Beach ports (they both publish data on their websites) we decided that we would take a closer look at this supposed 28.9% rise in total loaded containers.

Looking at the combined data we can see that not only have we had a strong rebound as of late but that it appears to have happened several times over the past few years.

Combined Port Data

After noticing that each year around this time ports have a drastic increase in total volume we broke the data down by month.  In the chart below you can see the March data from 1995 to now.

March Data

As evidenced by this chart it is obvious that March typically is a strong month.  In fact from 1995 to now it is on average the strongest month of the year.  The average gain from February to March is 10.69%.  The next best month on average is April with an average gain of 5.96%.

What this data shows is that while we did have a rebound of sort it appears to be a seasonal pattern that shows up almost every single year.  That being said the data is up and the economy could have turned and things could have changed……but we doubt it.

Happy Trading,

Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

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Here is a chart of all of the downswings of 10% or more (OK so one is only -9.96%) Click to enlarge.

SP500 Down Swings of -10%

Happy Trading,
Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

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CNBC has 50 guests a day coming out and saying that this is “THE” bottom, Kass comes out and calls it a “Generational Bottom”, and investors that are flat or short are wondering if they are missing the boat.

In times like these it helps to put things into perspective. One of the ways we do this is to compare our current situation with similar times in history. As you will see in the following charts there is a good chance that you aren’t missing much at all.

This chart is of the current situation.  We have marked each move of 20% or more.  As you can see we have already had three rallies that were up 20% or more in a matter of weeks, or even days. If you had bought the top of the first 20% rally hoping to not “miss out” you would be down over 20%.

SPY-SP500 ETF

As you can guess this is not the first time that this has happened. Every extended bear market in history has had multiple 20% moves that have only sucked in the desperate traders only to burn them with a long fast fall back to new low. If you look at this chart of the 2000-2002 bear market we had four rallies of 20% or more before finally bottoming out and starting the 2002-2007 bull market.

SPY-SP500 2000-2002

Going back farther here is the 1962-82 bear market.  Here we are using the Dow and the 20%+ swings are shown in the bottom pane where a reading of 1 means that there was a rally of 20% or more and a reading of -1 means that it fell by at least 20%.

Dow 1962-72

And finally we have the Great Depression.  Looking at the lower pane we can see that there were several different 20% or greater swings.

Dow Jones 1928-1940

The market loves to fake us out.  Bear markets are always more volatile than bull markets and this one is no different.  While this could be THE BOTTOM we tend to think that it is A BOTTOM and we are currently short.

So you may be asking what would need to happen for us to change our minds?  The simple answer is higher highs and higher lows, also known as an uptrend.  Other bullish signs would be economic indicators that actually improved instead of worsened, improved and sustained breadth, and some actual leadership.  By the way, banks will not be the new leaders.

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

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This week our equity risk index climbed a bit higher to 27.78%.  Remember that the higher the reading the more bullish that we are and the lower the reading the more bearish.  Over the past 18 months or so the risk index has hovered at or below 40% denoting a steady downtrend and re-enforcing our bearish outlook on the stock market.

So what would get us bullish and looking for long trades? The simple answer is higher highs and higher lows, in addition to an actual uptrend we also want some new market leadership and sustained breadth. We are still of the view that it will be a while before the market gives us a green light and we start trading heavily to the long side of things. That being said we are always open to change when the conditions warrant it.

Happy Trading,
The Macro Trader
Dave@TheMacroTrader.com

P.S.If you are interested in learning more about Macro Trading sign up for our FREE Macro Trading 101 course in the box below.

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