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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We run several different models that help us to determine what the market is favoring in regards to style-growth/value and size-market cap and right now they are pointing to a potential mean reversion trade going long Large Cap Value against Small Cap Growth.

Looking at the chart below you can see that over essentially the last decade the Russell 1000 Value and Russell 2000 Growth ratio has reached extremes around 1.00 and .82.  We are obviously nearing the lower end of the range where the Russell 1000 Value index typically takes over. (Click on chart to enlarge)

Russell 1000 Value/Russell 1000 Growth ETF Ratio

Since these types of mean reversion trades can last for a few years at a time it is important to look at as much data as possible.  Looking at monthly Russell data from 1979 to now you can see in the lower panel below that when normalized using a 36 month moving average that the ratio is more than one standard deviation away from the norm.  While it has been, and could definitely become more extended we are looking at this as a potential pairs trade using the ETF’s IWD for the Russell 1000 Value and IWO for the Russell 2000 Growth indexes. (Click on chart to enlarge)

R1KV/R2KG Ratio and Mean Reversion Charts

We also like the fundamentals of this trade.  If as we believe we are going to see what we are calling a slowth (slow growth) period for at least the next year or so and possibly for the next five plus years (what PIMCO calls the “new normal”) it would follow that the market would start to back out of small cap growth stocks and go to areas where there is more safety of principal as well as decent and reliable dividends.   This area typically is large cap value where most of the companies are diversified across the globe, across product lines, and have large cash positions.  In addition to the macro landscape, on a valuation/expected returns standpoint this area is also favored by some well known asset class return forecasts such as the GMO 7-Yr forecast seen in the chart below. (Click on chart to enlarge)

GMO 7-Yr Forecasts for US Stocks

Disclaimer-The Macro Trader currently does not hold any of these securities.

Happy Trading,

Dave@TheMacroTrader.com

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After a 72% move higher in the SP500 a lot of bears are saying that the market has gone far enough and that we are due for a new crash that will take us back to and in some cases past the lows of 2008.  While a crash is possible and probably justified we are instead looking for something along the lines of a modest pullback to maybe a 10% correction.

One of our favorite sentiment indicators is that of put/call ratios.  We use the 5-day equity only put call ratio to warn of high risk areas and to point our low risk areas.  As you can see in the chart below we are currently at a reading of .51 which is not only below out “high risk” threshold but is also the lowest reading in over a year.  While the signal could be wrong it is hard to argue that options traders are not overly one sided right now.

5-Day Equity Put/Call Ratio and SP500

In case you want to see more bearish sentiment look no further than the 10-day total put/call ratio.  Anything below .75 is typically considered very bearish and right now we have a reading of .68 which is the lowest reading in two years.  Needless to say this indicator is also showing that option traders are too bullish.

10-Day Total Put/Call Ratio and SP500

One price based indicator that we use at The Macro Trader fairly extensively is what we call a reversion to the mean chart.  Basically it takes a long term reading of the market, normalizes it, and then gives an overbought/oversold reading.  We then plot one and two standard deviation lines above and below the mean.  As you an see in the chart below we are about 1.5 standard deviations above the mean which is significantly higher than we saw for most of the 2002-2007 bull market suggesting that things are a bit overdone.

SP500 RTM Chart

Add to all of this a TD Sequential sell signal a few day ago and how near we are to a 50% retracement of the crash and things look less like a buying opportunity and more like a selling/shorting opportunity.  Again we are not calling for a new low, just a pullback/correction.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is short the SPY-Sp500 ETF

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Here is a shocker…..in spite of rising stock and bond markets and the supposed V shape recovery more and more families continue to go 90 days or more delinquent on their mortgages.  As you can see in the chart below since June of 2007 delinquencies have risen every single month. (Click on chart twice to enlarge)

Freddie Mac Delinquencies

To put this into perspective let’s drill down into the numbers a bit.The historic average delinquency rate for non-credit enhanced is .71% and the current reading is 2.88%.  The historic average rate for credit enhanced is 2.81% and the current reading is 7.84%.  The historic average rate for total is 1.08% and the current reading is 3.72%.  And finally the historic average rate for multi-family is .04% and is currently at .14%.  In case you haven’t noticed the current reading on each of these is anywhere from 2.8 to 4.08 times their historic average.

This is just one of the indicators pointing to further weakness in residential real estate.    One potential trade that we are following is that of shorting IYR.  For now we are just stalking it as it continues to move higher but we expect that in the next one or two months the reality will once again hit home and investors will start paring off some of their gains as the underlying fundamentals do not justify current prices let alone higher ones.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader currently holds no positions in housing related stocks.

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While extremely bullish sentiment does not always call tops it has never, at least to our knowledge, ever called a bottom either.  Looking at the chart below of the Investors Intelligence Bull Bear Ratio along with its 13-week (3-month) moving average you can see that not only has sentiment risen as fast as the market but it is at highs not seen since 2004.  While this is not necessarily a sign of a market crash like some would lead you to believe we do think that the current situation warrants caution.  We are currently not selling off our long positions but we are holding off from most long opportunities right now.   (Click on chart twice to enlarge)

Investors Intelligence Bull Bear Ratio

Happy Trading,

Dave@TheMacroTrader.com

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Over the past year one of the biggest themes has been to short the US Dollar and go long anything that is considered risky.  If you bought stocks, any grade of corporate bond, commodities, even real estate stocks and you would have made money.  Many strategists, The Macro Trader included, used the falling US Dollar as a reason to go long stocks, bonds, commodities, etc.  The reason of course is that since the March bottom the USD and the SP500 have been almost perfectly inversely correlated.  Well that relationship appears to be breaking down right now as the US Dollar has been rallying and other risk assets have not been falling in sympathy.

In the chart below you can see how as the US Dollar has fallen, the SP500 has risen.  In fact when there is a wiggle in the USD there is an opposite move in the SP500.  As you can see in the bottom right hand corner the USD is rallying while in the top right hand corner the SP500 is still looking strong. (Click on chart twice to enlarge)

US Dollar vs SP500

Of course if this inverse correlation is falling apart the correlation between the SP500 and the Euro is also falling.  Apparently, at least for now, you are able to be short the EUR/USD and still be long stocks and make money.  Looking at the chart below you can see almost the exact opposite of what we see with the US Dollar.  As the SP500 has moved higher the Euro has climbed as well until the last few weeks as the Euro has tumbled and equity markets as well as other risk assets have managed to remain strong and in many cases hit new highs. (Click on chart twice to enlarge)

Euro vs SP500

What do we take from this?  One thing is that the carry trade using the US Dollar was not as heavy as many people feared.  Another thing is that the market is always changing and that many intermarket relationships work well in some periods and fall apart in others.  As always it is important that we have solid risk management principles and that we are open to change.  For now we are short the EUR/USD and long equities…but that could change tomorrow.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is long several equity index ETFs such as IWF, EWZ, and MOO and we are short the FXE-Euro 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: US Dollar Correlations Breaking Down
URL: http://www.themacrotrader.com/2009/12/16/us-dollar-correlations-breaking-down/

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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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Why are bonds going up at the same time that gold is climbing? Real yields are the highest that they have been since the late 1980′s and the third highest in the last 100 years, investors expecting slow to negative inflation and growth are buying and will keep buying as they grasp for yield. (click on chart to enlarge)

10-Year T-Note Real Yield

Why has the SP500 continued higher even when earnings have been weak and unsustainable and demand has been virtually non-existent?  There are several contributing factors such as the oversold condition, sentiment, etc. but our favorite one is that the Government is debasing our currency and in the process it is driving asset prices but not their actual values higher, if your investment in the SP500 is up but the actual value of your dollar is equally low then have you actually made any money? (click on chart to enlarge)

SP500 and US Dollar Index

If we are in a deflationary environment then why is gold climbing higher?  No one wants to hold the US Dollar so instead of being a inflation/deflation play the current move of gold is based more on the devaluation of the US Dollar than anything else-It’s a currency trade. (click on chart to enlarge)

GLD-Gold ETF and US Dollar Index

If housing is cheap, interest rates are low, and everyone wants to trade their US Dollars for other assets than why aren’t housing sales going through the roof?  While your mortgage broker may be calling and saying that rates are at or close to all time lows the reality is that real rates are at their highest levels since 1987, cheap money my #%$. (click on chart to enlarge)

Real 30-Year Fixed Mortgage Rates

If demand is so weak than why has oil been so strong?  Once again it gets back to not wanting to hold US Dollars, when the USD bounces oil will likely get hit hard. (click on chart to enlarge)

West Texas Crude Oil and US Dollar Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some GLD-Gold 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: One Question, One Sentence, and One Chart Answers
URL: http://www.themacrotrader.com/2009/10/08/macro-trading-one-chart-answers/

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Gimme fuel, gimme fire, gimme that which I desire,

Can’t fight the need for speed,

I’m loose, I’m clean, I’m burning lean and mean, and mean.

Ignite the open trail,

Excite, exhale, comin on, hot from hell, yeah hot from hell.

-Metallica “Fuel for Fire”

Where has all of the money gone? We know that the world should be running out of green ink any day now due to the Treasury printing money 24/7, but with all of this money coming into the economy we would have expected runaway inflation.  Up to now we have seen, for the first time in decades, steady deflation.  In fact as you can see in the chart below, since 3/1/09 YoY CPI has been negative. (click on chart to enlarge)

CPI 12-Month % Change

One reason why we have not seen any inflation is due to the personal savings rate going up and private sector leverage going down.  For baby boomers and really anyone who has been investing for the last 15 years, things are looking bad.  From 1995 to now, investors using a 70/30 stock bond mix, rebalanced monthly and adjusted for inflation, have seen a CAGR of only 3.89%.  Add to that the debt loads that most people have, and it makes sense that the personal savings rate has shot higher and from all estimates looks to be going higher still. (click on chart to enlarge)

Personal Savings Rate

So the question remains where has all the money gone?  Looking at the  WSBASE which defined by the St Louis Fed as the sum of currency in circulation, reserve balances with the Federal Reserve Banks, and service-related adjustments to compensate for float-it is obvious that overall money supply has absolutely exploded to the upside. (click on chart to enlarge)

WSBASE

So where has all of this money gone if not into the general economy? In a relationship first pointed out by Andy Kessler, the WSBASE has tracked tradeable assets like the SP500 and corporate bonds since the March bottom.  If you look at the two charts below you can see that movement in the WSBASE has led the SP500 and Dow Jones Corporate Bond Index by about a month. (click on charts to enlarge)

SP500 and WSBASE

DJCB and WSBASE

When no one else wanted to own assets the Fed stepped in and became the buyer of corporate assets and has been the fuel that has driven this market higher.  In a vacuum this is not a bad thing, but we are not in a vacuum.  With the government putting all of the money into tradeable assets and not into the real economy, we end up with a market that could go down in flames at any moment.  What happens if the Fed backs away and stops buying?  If they stop buying, we run the risk of everything falling again and taking us right back to where we were.

The Fed in their infinite wisdom and bubble loving culture, continues to trade one bubble for another.  This time however, it appears as thought the bubble has not only been engineered by the Fed, but they have been the driving force behind it all.  As opposed to the housing bubble–where the Fed lowered rates and left them low but allowed people to build the bubble with their stupid home buying–this time the Fed lowered the rates, borrowed the money, and is spending the money.  Unfortunately for us when the bubble pops “the money” is really our money, and we come out on the losing end….again.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In our weekly newsletter The Macro Trader we are long SPY, LQD, HYG, DBV, and UDN

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: Give Me Fuel Give Me Fire
URL: http://www.themacrotrader.com/2009/10/01/macro-give-me-fuel-give-me-fire/

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In our last post we discussed how we at The Macro Trader think that risk is vastly under-priced.  We looked at several different volatility indexes as well as Bill Luby and VixandMore.com’s JunkDEX.  The JunkDEX shows how well stocks like AIG, FNM, C, CIT, and BAC are doing.  As you can see in our previous post “Volatility Indexes, Risk Appetite, Mispriced Risk, And Where We Think We Are Headed” the JunkDEX  has had a monster rally.  Usually this would signal at least a short term top as speculative fever burns out.   Obviously the rally was not done and we are up since then.

To more quantitatively show the huge run up in risky assets we went looking for some factor based indexes that would show the performance of “good” and “bad” companies.  In our search we came across some custom stock baskets from Goldman Sachs that use Edward Altman’s famous Z-score to separate stocks into strong and weak balance sheet indexes.

The Altman Z-score uses 5 financial ratios.  Altman took the 5 ratios and using statistical techniques was able to build the Z-score which predicts a companies probability of failure.  The higher the score the safer the business is and the lower the score the more danger there is of insolvency.

As was to be expected the performance between the weak and the strong balance sheet stocks has been drastic over the last 6-months.  As you can see in the chart below the low Z-score basket has vastly outperformed the high Z-score basket.  In fact the weak balance sheet basket has done almost twice as good as the strong balance sheet basket of stocks. (click on chart to enlarge)

Goldman Sachs SP500 Strong and Weak Balance Sheet Baskets 6-Months

While the result is not too surprising it is an example of bad investor behavior.  Academics as well as practitioners have found time and time again that safe low volatility stocks outperform risky volatile stocks over a full market cycle.  In fact if you look at the chart below you can see how the roles between the strong and the weak balance sheet baskets are totally reversed.  The strong balance sheet stocks are positive for the last five years while the weak balance sheet stocks are still very negative.  Another thing to notice is that the junk stocks went down a lot faster and more consistently then the quality stocks when the market tanked over the last two years. (click on chart to enlarge)

Goldman Sachs SP500 Strong and Weak Balance Sheet Baskets 5-Years

So what are we to take from all of this?  We think that the market is far too speculative given the current economic backdrop.  Earnings while “better then expected” are at record lows, unemployment is at highs not seen since the depression, we are experiencing deflation for the first time in several decades, the consumer is retrenching and not consuming, and really the only true “green shoot” was that it is not yet the end of the world.

Yes, we can go higher from here but the odds do not favor being heavily long right now.  Our basic forecast at The Macro Trader is that in the not too distant future we will have a correction if not worse and we will be able to buy stocks at a better price then where they are currently sitting.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are short some QQQQ-NASDAQ 100 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: Is Risk Dead? Or Is This A Bear Market Junk Rally?
URL: http://www.themacrotrader.com/2009/09/11/is-risk-dead-global-macro-trader/

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