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Goldollar Index

One important indicator for gold is the Goldollar index.  The Goldollar index is formulated by taking the price of gold and multiply it by the US Dollar Index.  This has the effect of giving us the trend of the price of gold isolated from movements in the US Dollar.  As far as we know the Goldollar index was devised by the McClellans of McClellan Oscillator fame.  Just as the developers intended we use this index to help forecast and confirm what the price of gold is likely to do and what it is currently doing.  If the Goldollar index breaks out to the upside gold usually follows, and if it tanks then gold follow to the downside as well.  While it is not perfect it has definitely aided us in our trading.

So what is the Goldollar index showing us right now?  As you can see in the chart below the Goldollar index in the lower pane looks similar to the gold chart in the upper pane.  The main difference is that the Goldollar index has broken out from its consolidation and is right at its highs and gold is not.  While not the holy grail, and therefore sometimes wrong this would indicate to us that in the relatively near future gold will be moving higher. (Click on chart to enlarge)

Gold and Goldollar Index

goldollar-index-and-gold

Disclaimer-currently hold no position in gold but that is likely to change soon

Happy Trading,

Dave@TheMacroTrader.com

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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.

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Happy Trading,

Dave@TheMacroTrader.com

G-10 Interest Rate Trends

While a lot has been made of the RBA raising Australia’s short term rates over the last week the fact is that most of the world is not doing quite as well.  Whereas Australia actually has some inflation the United States, Japan, and Europe are still not growing and rates are likely to stay around their current levels for at least a few more quarters.

Australia on the other hand was able to avoid a large part of the current global recession by supplying Asia, namely China, with commodities.  As you can see  in the chart below the short term rates have climbed but in spite of this the long term rates are still basically unchanged. (click on chart to enlarge)

Australia Interest Rates

australia-interest-rate-trends

Looking at the G-10 as a group we can see that rates are low and aside from Australia and New Zealand rates are essentially unchanged for the past six months as central banks continue to fight deflation and disinflation.  The trend is flat and likely to stay that way. (click on chart to enlarge)

G-10 Short Term Interest Rates

g-10-short-term-interest-rates

With the current rally and all the talk of inflation you would expect that long term rates would be climbing but instead they are flat to trending lower in every single G-10 country.  Treasury bonds night be in the bubble of a lifetime but we are not seeing that yet with lower rates and extremely slow global growth, especially in the developed world. (click on chart to enlarge)

G-10 10-Year Interest Rates

g-10-10-year-interest-rates

If you want to see a cleaner chart with the average G-10 long and short term rate you can look at the chart below where we have taken a simple average of G-10 long and short term interest rates.  As you can see everything has remained the same for a few months now. (click on chart to enlarge)

G-10 Interest Rates

g-10-10-year-interest-rates1

Finally lets look at the whole investable world.  As you can see in the chart below the Global GDP weighted yield curve has been flat since May 2009 with very little change.  If inflation is hitting the world right now then it would appear as though bond investors are clueless.  In our experience bond investors are rarely clueless and we are inclined to bet with them.  Right now we are looking at potentially re-entering our long bond trade as investors come to the realization that we, along with investors such as PIMPCO (maybe its PIMCO but the way that Bill Gross ran the Fed last winter we can’t help ourselves) , see slow to negative global growth over the next year and probably for the next few years as the worlds financial system rebuilds, assuming we get that far. (click on chart to enlarge)

Global GDP Weighted Yield Curve

global-gdp-weighted-yield-curve

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some GLD, DBV, and HYG

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: G-10 Interest Rate Trends
URL: http://www.themacrotrader.com/2009/10/16/g-10-interest-rate-trends-macro-trading/

One Question, One Sentence Answer, and One Chart

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

10-yr-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

spy-sp500-etf-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

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

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

wtic-crude-oil-versus-the-us-dollar

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some

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/

Volatility Indexes, Risk Appetite, Mispriced Risk, And Where We Think We Are Headed

If over the past six months or so it has seemed as if you were partying like it was 1999 it might be time to reevaluate your stance.  One thing that we have been taking a closer look at lately is the pricing of risk.  Obviously when investors think that risks are low they will demonstrate risk seeking behavior.  We have seen this as the SP500 has climbed 56.6% from the March lows to the highs on 8/28/09.  With a rise like that you would think that 2008 never happened, of course if you believe that then you also believe  in a land of make believe with money trees, the fountain of youth, and SI models for all of us.

Of course some investors counter saying that while things could be better we are seeing the beginning of a recovery.  They then say that while the market will likely climb slower, that it will still climb higher.

While the above scenario is possible, anything is possible.  The more important question is to decide if the rewards outweigh the risk involved in being long equities right now.  Or even if at this point the better risk reward trade is to the downside.

Lets look at a few “risk gauges” or “fear indexes” as the press likes to call volatility indexes.  The first is of course the VIX.  After spiking to all time highs in October and November of 2008 we are already well on our way towards what was considered a “normal” level back in early 2008 before Bear Stearns.  The potential risks were obviously very mispriced at the beginning of 2008, are they mispriced again?  While likely not as off as they were at the beginning of 2008 we still think that there are a lot more real and potential risks then the market is currently pricing in. (Click on chart to enlarge)

SP500 VIX

sp500-vix

What about foreign markets?  How do investors perceive the potential risks abroad?  Well if the VDAX is any gauge then investors see a rosy future in Europe as well.  Again maybe there are no big risks and maybe the EU is rock solid.  Then again maybe not.  With the complete lack of liquidity that businesses have had over the past several months in the EU it is really surprising that the VDAX is back to pre-crisis levels. (Click on chart to enlarge)

German DAX VIX

dax-vix-volatility-index

What about other asset classes?  What are investors saying about potential risks?  Using the MOVE Index which measures the range in which Treasury yields are expected to move over the next 12-months we can see that even here investors are becoming increasingly complacent.  What happened to the runaway inflation that we keep hearing is right around the corner?  Right now the market is saying that we will be in a 130 basis point range for the next 12-months. In The Macro Trader weekly newsletter we are long the TLT 20+ Year Treasury ETF and are expecting a bigger move then is currently implied via the MOVE index. (Click on chart to enlarge)

MOVE Index

move-index-merrill-option-volatility-index-treasuries

Even in the currency markets we are seeing extreme complacency.  Apparently investors the world over are back to selling dollars in exchange for anything.  While the USD has its issues other currencies do to.  Right now the currency markets are not participating in the Keynes beauty pageant where you are trying to pick the girl that you think the judges will think is the beautiful.  No, with the current state of the global economy we are in the least ugly pig contest where we are only trying to find the least ugly.  That being said investors do not appear to see a lot of volatility any time soon. (Click on chart to enlarge)

JPM G-7 VIX

jpmvxyg7-g-7-volatility-index

Even the emerging market currency volatility index is showing complacency. What happened to the banking issues in Eastern Europe? Apparently they vanished, or at least that is what it seems as though the market is telling us.  (Click on chart to enlarge)

JPM Emerging Market FX VIX

jpmvxyem-emerging-market-volatility-index

Even commodities markets are pricing in realtively low risk. While the price history of the Crude Oil and Gold volatility indexes does not go back as far as we would like, you can get a feel for what is happening as both indexes are dropping at a very steady rate.  Do investors really think that volatility will stay that low?  What happened to the oil spike if demand comes back?  And what happens if gold breaks $1000 on fears of hyper inflation?  (Click on charts to enlarge)

Crude Oil VIX

ovx-oil-volatility-index

Gold VIX

gvz-gold-volatility-index

Another excellent tool to evaluate the blind risk taking happening right now in the stock market is the JunkDEX invented by Bill Luby over at VIX and More.  By taking an equal weighting of junk stocks AIG, FNM, C, CIT, and BAC you can see how crazy or composed investors are acting. While we have seen, and actually use, an index of high momentum stocks we had never thought of making an index that tracks junk stocks to gauge investors risk appetite.

As you can see in the chart of the JunkDEX below the junk led the market off the bottom and then lagged until the last month when the index shot up +157.36% in a little over a month.  While it has pulled back over the last two days we are still in awe that investors are dumb enough to buy this junk at these prices. (Click on chart to enlarge)

VIX and More JunkDEX* vs SP500

junkdex-vs-sp500-2009

After looking at all of this we need to ask ourselves if the rewards outweigh the risk to stay long?  Or if we should be flat or short.  In case you have not guessed we currently think that the risk reward is pointing to the downside.

Looking at the QQQQ we have a setup with a solid risk to reward situation. As you can see in the chart below the QQQQ has rallied back to its 50% retracement level, its 200-week moving average, and its downtrend line extending from October 2007.  While it could of course rally higher we like the risk reward enough to have put on a modest short position in our weekly Macro Trader newsletter. (Click on chart to enlarge)

QQQQ-NASDAQ 100 ETF

qqqq-weekly-chart-short-setup

While not quite as nice of a setup as the NASDAQ 100, the SP500 also looks like a solid risk reward trade to the short side.  As you can see in the chart below of the SPY-SP500 ETF it has rallied up to the upper Bollinger Band and has already started to come back in.  We are looking for a move back to at least the $95-96 area. (Click on chart to enlarge)

SPY SP500 ETF

spy-sp500-etf-daily-chart

Obviously anything can happen.  The market could go up every day for the next year, or it could go down every day, but our job as traders is to look for the best risk to reward scenarios that we can find and place trades on probable scenarios and right now we think the most likely scenario is for the market to at least have a pullback if not a correction back towards its 200-day moving average.  Of course if this happens we will see the volatility indexes tick upwards to more realistic levels given our current economic environment.

*Our JunkDEX differs a bit from the one you can see at VIX and More.  After looking into it we found that  we built the index by simulating a $1000 investment in the index and in the SPY and Bill built it by normalizing the index starting value so we have slightly different values.  But don’t worry as the chart looks essentially the same and shows the same investor insanity.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter as well as our accounts we are currently short some QQQQ-NASDAQ 100 ETF and long some TLT 20+ Year Treasury 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: Volatility Indexes, Risk Appetite, Mispriced Risk, And Where We Think We Are Headed
URL: http://www.themacrotrader.com/2009/09/02/mispriced-risk-macro-trader