Many new traders spend a lot of time looking for the holy grail of trading.  The secret Gann angle, the right wave count, the perfect valuation model, etc.  What we have found is that while a lot of new and even old traders spend countless hours searching for the holy grail very few, if any, successful traders have found it.  Instead they figure out at some time or another that instead of a magical tool they should spend their time looking for useful tools that do a reasonable job of either lowering risk, increasing return, or increasing their hit rate.

One tool that we have found useful in looking out towards the future is that of the ECRI Weekly Leading Index.  While by no means a holy grail it has historically done a fairly good job at forecasting stock market returns.  As you can see in the chart below it has been very accurate over the past few years as it has led the SP500 by several months at important turning points.  (Click on chart to enlarge)

SP500 Year Over Year % Change and ECRI WLI Growth Rate

So what is the WLI saying right now?  Going along with our long held deflation thesis the WLI is now pointing towards slower growth in both the economy and particularly in the so-called “risk markets”.  This of course matches what we are seeing in several other indicators and relationships that we follow.  We have covered a few indicators in previous posts such as how junk spreads point to higher unemployment claims and how the PMI is pointing towards slower growth.  In addition to these we are seeing many other signs such as the drop in commodities, take a look at the CRB Raw Materials Index, and in the rise of the US Dollar.  Of course none of these are holy grails, just signposts in the fog.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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The following was sent to subscribers Tuesday night but is still entirely relevant to the current market.

In a paper entitled “An Exploration Of The Nature Of Bull Market Tops” by Lowrys Research written in 2006 we learned that in previous stock market tops the day of the top saw only a few stocks in the major indexes hitting new highs.  Most of the constituents were down and many were down more than 20% from their highs.  Contrast that to major bottom when almost all the stocks are at or near their lows.

That brings us to Tuesday the 26th when the NASDAQ 100 hit a new high.  How many stocks closed at new highs?  If you answered three you are right.  How many are at least -10% off their highs?  If you said 51 then you are once again a winner.  And what about stocks that are at least -20% off their highs?  That answer is 19.  So almost 20% of the index is at least -20% off their highs, 51% of the index is at least -10% off their highs, and only 3% of the index is at new highs.  The average stock in the NASDAQ 100 is off -12.76% from its 52-Week High.  Is that the sign of strength that you were looking for?

Lets look at another index that should be a harbinger of things to come in the economy the SP100.  Also known as the OEX the SP100 is the mega-cap index that looks at 100 of the largest companies in the SP500.

With the SP100 trading just -2.3% off its cycle highs how is the breadth here?  Is the NASDAQ 100 just experiencing a tech sell off or is it more widespread?  Well 39% of the SP100 is off at least -10% and 9% is off at least -20%.  A better showing than the NASDAQ 100 but not exactly New Highs R Us either.  How many of the stocks hit new highs Tuesday?  Only Apple.  The average stock of the SP100 is off   -9.35%  from its 52-Week High.

In the following table you can see the NASDAQ100 and the SP100 side by side.  In the 52 Wk High column you will see the 52 week high on a close basis as of Monday the 25th.  In the % From 52-High column you see how far off the 52-week high the stock is.  In the case of AAPL and a few others they are blue and have positive reading denoting a new 52-week high made on Tuesday the 26^th.  Finally at the bottom is simply the max and the min for each index.

SP100 and NASDAQ100 52-Week High Table

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Disclaimer-We have very light long exposure to equity markets right now.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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10-Yr Swap Spreads hit their lowest level since 1988 on 3/9/10 hitting 3.25.  How many more days until they go negative? (Click on chart to enlarge)

10-Yr Swap Spread

Go short Treasuries, its the most obvious trade ever right?  While they might go up or down the MOVE Index continues to forecast less and less volatility, which at least to us indicates that the market is not expecting yields to change a whole lot anytime soon. (Click on chart to enlarge)

MOVE Index

Not sure if Chanos is right on China being in a huge bubble, but looking at the chart it appears as though at least a few investors are less than bullish. (Click on chart to enlarge)

FXI China ETF

We just crossed the one year anniversary of the current rally/bull market the other day.  Over that time on a weekly closing basis the SP500 is up over 66%.  This has been the largest one year rally in over 60 years.  We are starting to hedge our long exposure as we are currently cautiously bullish. (Click on chart to enlarge)

SP500 1-Yr Rolling Returns

Back in December we shorted the Euro on the basis of the EU being weak, overvalued, and sentiment becoming far too one sided.  In these pages we also looked at buying the USD on a technical basis. Looking at the USD and T-Bills however shows another reason for the USD rally. (Click on chart to enlarge)

US Dollar and T-Bill Yield

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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Since launching The Macro Trader in November of 2007 our subscribers were able to avoid the crash of 2008 and while we were not as short as we would have liked we were profitable, all this in a year wen the SP500 was down -38.5%.  Recently we publicly called the downturn in the Euro in our blog post entitled “Is It Finally Time To Short The Euro“  as well as calling the correction in the stock market with our post “It’s Time For A Pullback In Stocks.”  While we definitely do not get everything right we do strive to provide some of the best and most actionable research available.

If you have been a blog reader and enjoy what you read then take a $1 trial to our weekly newsletter The Macro Trader.  Simply click on subscribe, pick your subscription and you will be given the first month for $1 and then either be billed monthly, quarterly, or annually depending upon what you choose.

In our weekly newsletter we cover stocks, bonds, commodities, and currencies.  We run a model portfolio using ETF’s so that our research is accessible to both retail and institutional investors alike.  Every other week you will receive an extensive letter with tons of in depth research and on the other weeks you will receive a shorter version with summarized versions of our views and any new actionable trade ideas.  In addition to the weekly letter we also send out regular mid-week updates with trade ideas, research, commentary, etc.  If you want great research and actionable trade ideas spend the $1 for a one month trial, it is likely the lowest risk trade out there.

Happy Trading,

Dave@TheMacroTrader.com

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One of our major themes here at The Macro Trader over the past two years has been to short Europe.  We mean that in a general sense as we have been short Spain and Italy off and on for over a year and are bearish on most things EU relative to most of the world.  One area that we have been looking at a lot lately is that of the Euro.

After being overvalued by 40% back in March of 2008 the Euro fell about 20% as investors went into risk aversion mode and bought the US Dollar.  Since March of this year the Euro has once again climbed into wildly overvalued territory again and is currently about 35% overvalued. As you can see in the chart below when the Euro gets very far above or below the 20% bands it has a relatively sharp tendency to revert to the mean. (Click on chart twice to enlarge)

EUR/USD PPP Chart

Our view is that sometime in the next few months we will have a modest US Dollar rally as investors leave the Euro.  In fact this is one of the primary reasons why we think that gold has been working out so well.  Basically the EUR, USD, and JPY are all really weak and investors are doing anything possible to diversify out of them.

One tool that we use a lot to gauge our timing in regards to trading currencies via PPP valuations is that of the different volatility indexes.  While you can monitor the EVZ Euro VIX, we also look at the JP Morgan G-7 VIX so to help us gauge the risk aversion in other G-7 currencies as well.  Right now this is important as there are several currencies overvalued by 20% or more, but that is for another post.  Anyways as you can see in the chart below the JP Morgan G-7 VIX is at relatively low levels and is showing little sign that anything is happening yet.  (Click on chart twice to enlarge)

JP Morgan G-7 VIX

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is currently not short the EUR/USD  but that will change at some point.

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: The Euro Is Overvalued
URL: http://www.themacrotrader.com/2009/11/13/euro-is-overvalued/

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Since the start of our newsletter we have been using a relative strength table that looked at Fidelity Select Sector Funds to show what industry groups are leading and which groups are lagging.  The relative strength calculation is similar to the style used by Bill Oneil and IBD but is slightly shorter term in nature. We used the Fido Funds due the their price history and breadth of different groups.  Now that there are not only enough different industry group ETF’s, but also the needed price history we have revamped the model to use ETF’s instead.

We publish one list for United States industry groups and one that is focused on global ETF’s with several country and a few sector specific ETF’s.  These tables are valuable in a few ways.  One is that we have developed a trading model based upon them that uses the rankings along with buy, sell, and money management rules.  Over time this model has beaten the market with far less risk.  The other way that these tables are useful is that they show you what is strong and what is weak.

While this concept is not rocket science we are consistently surprised how little attention it is given by other traders.  By using relative strength we can see what is really working and where investors are going.  Many times the supposed “hot sector” is not really that hot.  By looking at the tables we can see what is really working and what is not.  For instance looking at the Global RS Ranking table below you can see the leaders and the laggards.  While it is no surprise that Brazil is at the top when was the last time you saw someone on CNBC telling you to buy Indonesia or Turkey?  Yeah we missed that segment as well. (click on table twice to enlarge)

Global RS Rankings

Right now this table is confirming to us that for the most part developed nations are weak and should be sold and that emerging markets are strong and should be bought.  No, this is not the first or the only tool that told us this same thing but it is one way in which we can systematically be long the best areas of the world and short the worst areas of the world.  It also gives us a road map of where investors are putting their money and where they are withdrawing it.

Another point worth noting is that while we are starting to run this as a “standalone system,” the system represents only a part of our portfolio.  In our trading and our newsletter model portfolio we use several different methods in order to build a less correlated portfolio trading across asset classes.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long EWZ-Brazil, EWT-Taiwan, and EWM-Malaysia

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Macro Trading Using Relative Stength
URL: http://www.themacrotrader.com/2009/11/10/macro-trading-relative-strength/

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One of our favorite, as well as one of the best indicators that investors can follow is that of interest rates.  Since we are global macro traders we follow interest rates across the globe for every country that we can find reliable data.  We track short and long rates for 58 different countries for use in many of our models as well as for other indicators like global and regional yield curves.

As you can see in the chart below (click to enlarge) short term rates for the G-10 are low.  In fact right now there are five countries that are following a zirp (zero interest rate policy) and consequently their 90 day rates are down under .5%.

G-10 Short Term Interest Rates

After dropping significantly throughout the second half of 2008 as Government Bonds went into the stratosphere, rates have since recovered quite a bit during 2009.  As we mentioned in a previous post on Treasury Bonds we think that just like rates overshot to the downside they have also overshot to the upside.  With recent comments by the Fed that essentially said that they will not be raising rates for the next year…or two, we are a bit taken back by the sell off in Treasuries the past few days.  (click to enlarge)

G-10 Long Term Interest Rates

The chart below  (click to enlarge) shows the average 90-Day and 10-Year government yield for the G-10.  In our view this chart shows how the ECB was very slow to lower rates while still preoccupied with the fear of inflation in the fall of 2008.  Looking back, and even at the time, this view was ludicrous as everything on the planet was dropping like a rock.  In fact the world at one point had lost 42% of its wealth.  Obvioulsy rates were eventually lowered but we were, and still are a bit amazed by the lack of understanding shown at the depths of the crisis by Jean Claude Trichet and his crew.

G-10 Short and Long Rates

Here is the chart (click to enlarge) of the G-10 GDP weighted yield curve.  As you can see it is extremely steep with the spread at 2.63% after having been negative back in late 2007.  Remember back in 2007 when people were saying that this time it was different and that the economy was great?  Well they were wrong and the yield curve gave a big neon flashing warning signal.  We were fortunate in that by heeding its cry we were able to not only preserve capital but actually generate positive returns in 2007 and 2008.

G-10 GDP Weighted Yield Curve

Finally here is the Global GDP Weighted Yield Curve (click to enlarge).  Using the country weightings in the MSCI index it is made up of 40 different countries. It has hit new highs this week at 2.20%.

Global GDP Weighted Yield Curve

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

TheMacroTrader.com

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Global Interest Rate Trends
URL: http://www.themacrotrader.com/2009/07/16/global-interest-rates

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In our ETF based newsletter, the carry trade is one of the strategies that we employ.  For those unfamiliar with the carry trade, you are essentially trading the interest rate differentials of different countries.  You short a low-yielding currency and go  long a higher-yielding currency.

You can make money in two ways.  You earn the “carry” if the currencies remain very stable, and neither move.  You can also make money in this trade by being correct in the direction.  For instance if you are short the Japanese Yen and long the Australian dollar, then you can also make money if the Australian dollar goes up, and the Yen goes down.

As an example of how to earn the carry, lets look at the Japanese Yen versus the Australian Dollar.  The Yen has been the carry trade vehicle of choice for much of the past decade because Japan has consistently had extremely low interest rates.  Australia, on the other hand, has had relatively high rates over the last decade.

To construct the differential for this trade, take one rate and subtract the other rate. In the chart below, we plot the difference between the AUD and the Yen since the beginning of 2007.  As you can see, at one point the carry was as high as 7.34, but it has since declined to 2.69.  If you had been long the AUD and short the Yen, you would have earned this interest rate differential the whole time.

AUD-JPY Interest Rate Differential

Of course as we already mentioned, in order to make money on the carry trade, your long must outperform or stay flat relative to your short position in order to make money since a big directional move against you will wipe away any gains that you would be making solely off the carry.

There have been several academic studies as well as real world trading results that show that volatility is the biggest risk that the carry trade faces.  Over the years, most studies were stuck using the SP500 VIX as a proxy for global financial market volatility.  While it correlates quite well, there are now some far better options to help track and manage risk in the currency markets.  We at The Macro Trader use the JP Morgan G-7 VIX index for our carry trading model as it correlates extremely well to the volatility in the DBV-Currency Harvest Trust ETF.

What we first found in the academic literature, later confirmed by our own testing and used successfully in our trading, was that when volatility in the currency markets is flat or declining, the carry trade works very well.  On the other hand, when currency volatility is high, the carry trade typically is a money loser because the directional aspect of the trade overwhelms the carry, giving you a loss.

We look at the JP Morgan G-7 VIX using two different charts.  The first one is a reversion to the mean chart where plot the VIX data, the historic mean, then one and two standard deviations above and below the mean.  When volatility is high and then falls below one standard deviation, we start looking to enter the carry trade and when it get above the one standard deviation line we would sell if not already stopped out.  On the downside, we look to sell when volatility declines too much since it represents excessive complacency and usually is a sign of higher volatility ahead.

JP Morgan G-7 VIX

The other way that we like to look at the currency VIX is to invert it on a chart alongside the DBV. As you can see in the below chart, not only was equity volatility declining, but DBV managed to base for a few months before climbing higher and then consolidating at its 200-day moving average.  Finally today it was able to break out to the upside.

DBV and JPM G-7 VIX

Finally we have the DBV itself.  As you can see in the chart below, not only was equity volatility declining, but DBV managed to base for a few months before climbing higher and then consolidating at its 200-day moving average.  Finally today it broke out to the upside.

DBV-Carry Trade ETF

Hopefully you see how volatility is bad for a lazy trade like the carry trade where you trying to get paid for sitting.  If volatility climbs above 1 standard deviation above its mean we will look to tighten our stops as the odds of a downside move increase significantly.

DBV-G-10 Currency Harvest Fund is an ETF that goes long the three highest yielding currencies of the G-10 and shorts the three lowest yielding currencies on a 2x levered basis.  While investors can go into the spot and futures FX markets and put on the same trade the DBV is a very simple way to gain exposure to positive carry in the currency markets.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Disclaimer-We currently hold positions in the DBV-G10 Currency Harvest Fund and FXA-Australian Dollar ETF.

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: The Carry Trade And Volatility
URL: http://www.themacrotrader.com/2009/06/01/the-carry-trade-and-volatility/

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One of our current positions is EWY the South Korean ETF. We went long a few weeks ago in our model portfolio based on the trend, valuation, and economic characteristics of South Korean stocks.

EWY-South Korea ETF

Another factor that got us into EWY was the increasing number of Asian countries that have been coming up in our global stock model.  Our global stock model looks at technical, economic, fundamental, and sentiment indicators to help find foreign stock indexes that meet our risk to reward criteria.

Apparently we are not the only ones to have found an opportunity in South Korea as the Oracle himself WarrenB apparently is getting long some South Korean stocks as well.

In order to catch our trades in foreign stocks as well as other asset classes like US stocks, bonds, currencies, and  commodities then sign up for a quarterly or annual subscription to The Macro Trader weekly newsletter with frequent intra-week updates.

Happy Trading,

Dave@TheMacroTrader.com

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In our newsletter this week we went long some UNG-Natural Gas and it is working out well.  The long term supply and demand characteristics were very favorable around the recent lows and we had a good technical picture as well.  As you can see in the chart below UNG has exploded to the upside on extremely high volume.  To put where natural gas is in perspective we also included a longer term chart showing the past 14 months.

UNG-Natural Gas ETF

UNG-Natural Gas Long Term Chart

Happy Trading,

Dave@TheMacroTrader.com

P.S. If you don’t want to miss out on more trades then subscribe to our weekly newsletter where we provide research on Domestic Equities, Foreign Equities, Fixed Income, Commodities, and  Currencies along with a model portfolio.  If you are interested in going beyond US stocks to generate returns in any market, we at The Macro Trader can help.

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