0 Global Macro: The Bernanke Floor

Since the inception of Quantitative Easing, many have debated its diminishing returns quality. Although easing does manipulate true market action, this is not to say it harms it. Speculation surrounds what will happen when it is all said and done, but currently, QE has brought into existence a Bernanke Put of sorts. The Fed was initially created to aid in times of crisis, in order to limit its effects. With the macro picture as it stands, the Fed looks to provide liquidity and limit loss. Diminishing effects implies a lesser pop on announcement, but a pop is superior to a downturn. Markets turned higher today on dovish tones from the fed; which begs the question, do you prefer capital preservation to margin calls? Gradual growth has been expected, but high unemployment for too long leads to structural damage. This damage could lead to far reaching issues, and could even be magnified with a weaker global picture. The Fed realizes this, and says it stands ready.

As evidence to the fact that a Bernanke Put improves market confidence, consumer sentiment rose to its highest level since May. Although uncertainty has littered the air, the belief in a floor of future despair kept sentiment high. As long as hope remains in markets, sell offs should not be overly drastic. Bernanke controls what he can, but Draghi and Germany have issues in their own right. Further announcements should keep markets on their toes for the better part of September.

The first quantitative chart to be discussed is inflation protected treasuries (TIP) vs. 20+ year treasuries (TLT). This ratio gives room to the idea of more easing. As inflation and economic growth expectations diminish, the indicator falls. It correlates strongly with risk assets, but has shown price weakness lately. This indicator usually bottoms prior to QE announcements, but as of late, it has kept falling. It is not to say we are as bad off as in 2008, but the Fed was right in its remarks. Growth is between the realm of gradual and anemic, which will further dampen outlooks unless corrected.

Along the same lines, commodities prove to be an indicator of global market health. The ratio of commodities (DBC) over treasuries shows the markets are reverting towards lower trend lines. It broke out higher in mid June and has led throughout the current rally. However, the macro picture still has many questions to be answered, and until they are, commodities won't continue to lead. The MACD tracking this indicator has broken lower, but sees resistance at the zero level. The solutions to be unturned in the near future will determine its direction.

In order to see things that the market doesn't, it sometimes requires obscure methods. In this case the obscure indicator is Put/Call Equity indicator over gold (GLD). Put/Call moves inverse to equity markets and gold moves purely on supply/demand. As calls are accumulated, bullish sentiment rises. However, to put this single aspect to the test, one can add another leg. Gold acts as a weight of sorts, and when calls or puts are being accumulated with vigor, the indicator will show it. The weight adds to the already strong inverse correlation, and as can be seen, there is some upward break. This is bad for risk assets, including equities. It will need to continue lower for sentiment to remain intact.

The last price ratio contains copper. Copper is said to be a solid indicator of economic outlook and this indicator confirms it. Copper (JJC) over treasuries correlates around .93 with equity. It has been range bound for much of the current risk rally, but looks to be showing weakness now. The break of both its price action and MACD underlying indicator are bearish for copper and risk as a whole. The fundamentals driving the move are weakness and lack of clarity out of China, as well as a struggling Aussie Dollar/Asian equity. The fed announcement should aid its move, but economic strength is the real catalyst.

Overall markets have a perceived put in place. This is due to the belief that Bernanke and Draghi stand ready for action. The only downside is if a macro situation unfolds that compromises their ability. If they begin to look overwhelmed at any point, then markets will break lower with force.

0 Global Macro: A Volatile Environment

The Macro outlook is currently littered with uncertainty, yet it contains a hint of predictability too. The decisions to be made over the next month are primarily concerned with political action. Bernanke meets in Jackson Hole on Friday, and there is the belief that he may reveal his hand. The ECB meets throughout September, but the date on which a solution will be presented has less clarity. Along the same line, there is an idea that China may intervene to compensate for the East's recent string of bad data. All events are known to be pending, but their outcomes are unknown.
With the overhang of uncertainty, the call for volatility is valid. The VIX (VXX) has been silent as of late, but a swift return remains. An indicator that highly correlates with VIX is utility stocks (XLU) over equity markets (RSP). It and VIX trade near a .75 correlation, yet their charts vary. What is clear in the image below is that the ratio looks ready for a pullback. Its MACD is fairly below the downtrend line and the price action in general looks to be rounding back. This could foretell the coming weeks of announcements, and a move lower in equities.

The next look is gold (GLD) over the Yen/Euro cross (FXY)(FXE). The Yen/Euro is another asset that has been trading alongside volatility recently. By comparing its move to inflation linked gold, one can measure market sentiment toward riskier assets. Gold has gotten a footing, but fear must sufficiently leave the markets for the yen to experience selling pressure. If both assets can sustain their respective trends, then risk should avoid a drastic sell off.

Spanish equities have similarly been in the spotlight recently, and their future direction speaks volumes for the markets as a whole. Spain equities (EWP) over world equities (VT) is the indicator below, and it shows a compelling story. With the paradox being that the ECB won't initiate bond buying until Spain agrees to their measures and the other way around, Spanish equities are at a standstill till a decision is made. Spain has been leading as of late, with a steep slope, the indicator is primed for consolidation. Within the broader framework of the chart, the price action's next move has strong implications. If it continues higher with vigor, the chart has bottomed; but if it bounces off resistance, the downtrend becomes stronger. The next few weeks should give a sense of direction to this sideways indicator.

With the various indicators above each telling a story of their own, they all inherently reflect a bigger picture. The markets have been moving on an idea, but this idea has yet to manifest itself. If one is to believe that we have priced in easing, then lack thereof should ignite selling. The money that now resides in the market is playing a guessing game with central banks. In other words, their premises are pure speculation.

0 Global Macro: The Macro Trade Requires Eyes On All Markets

The macro trade currently requires a three pronged approach. The only way to navigate is to keep a keen eye on US, China, and European revelations. Markets spiked on the idea that the Fed could stimulate, but backed off when they questioned its probability. The biggest wrench in the easing debate currently, is whether economic data has improved enough to not warrant it. However, the minutes were clear, enough so to diminish much of the perceived vagueness. There was a call for substantial and sustainable economic data growth in order for the Fed to back off further easing measures. The data to date has been sporadic, and looking at indicators on a moving average basis, you will be hard pressed to find a clear upward trend.

The first chart is that of junk debt (JNK) vs. 20+ year treasury (TLT), this indicator correlates well with the risk on markets. The ratio hit a wall of resistance, and with lack of substantial and positive evidence, it receded lower. Junk was yielding record low rates, and the run up even had Pimco cutting its exposure to the field. There is certainly room for a move higher, but this looks to correlate with further news to catalyze markets upward.

The next ratio of importance is European financials (EUFN) vs. the global equity market (VT). With so much hanging around the dealings of Europe, in both its Sovereign and Corporate debt markets, this indicator has a lot of sway. There looks to be improvement in the leadership, and meaningful plans seem to be in the works. The indicator must outperform in order for global confidence to regain its footing. The ability of both peripheries and core countries to decide on realistic plans, flexible and pragmatic, will lead to improved sentiment around the region. Sentiment has driven European yields, and cohesion amongst the group will only lead to more advance. The indicator looks to have reached resistance until further progress is made. Look for action in September to greatly influence its move higher, or lower.

A move to the Far East presents a gloomier appeal. The indicators of choice are China (FXI) vs. world equity and Japan (EWJ) vs. world equity. Both markets have vastly underperformed over the past nine months. The shrinkage of exports in both is a concern, and can be attributed to a weaker global economy. Japan's drastic currency appreciation has done nothing to help its cause. Weak equity environments highlight each regions economic issues, and signal the need for relief. A move from the PBOC could moderate such declines, and would be positive for risk across the board.

An externality from a stronger Asia would be stronger commodities. The indicator in question is that of Copper (JJC) vs. 20+ year treasuries. This indicator shows strength in the face of inflation, and some form of easing out of China will prop it up. Risk on markets, as a whole, have moved on the notion that someone in the developed world would make a move to stabilize their economy, and copper has similarly oscillated alongside the idea. A move by at least one of the central banks should traject copper upwards, and out of its range.

Keeping this premise in mind, another market to watch is emerging equities. Emerging equity (EEM) vs. the world equity market, has a vested interest in China and the global economy as a whole. This indicator has been somewhat breaking down lately, and must show strength for confidence to return to the macro economy. The ratio's MACD indicator has been oscillating between bull and bear territory for months, and looks to make a move on more tangible evidence out of the developed world. Its hand being in commodities and exports as a whole, requires a stronger environment of operation. Until that environment is produced, this indicator will show weakness.

The last chart is that of the S&P 500 (SPY). Many people believe that the expectation of QE has led to the pricing in of its move in totality. Basically, that the market has run its course. The volumes have been low, but this was expected until tangible evidence was produced. Along the same thought, no meaningful breakout should be conceded until more evidence is shown. Based on the indicators above, equities do look to have more room, considering much of its suppression has been derived from the aforementioned problems. If problems are meaningfully fixed, why shouldn't risk breakout to new highs?

0 Global Macro: The World Awaits Stimulus And Deals With Uncertainty

Although speculation and waiting are still the name of the game in both Europe and the U.S., China is feeling the pain now. Its exports have weakened and its equity markets are in decline. The chart below shows Chinese equities (FXI) underperforming World Indexes (VT) for upwards of three years. This indicator has seen great resistance for years due to the perceived risk of Chinese equities, as well as the fear of a hard landing for its broader economy.

With lowered inflation and the fear of what global weakness could bring, look for China to turn toward easing soon. The country has been quick on the trigger over the past few years. Whether in the form of interest ratecuts, a cut of the reserve ratio, or stimulus in the form of spending, expansionary moves look to aid assets with a vested interest.

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Copper looks to find a bid in this instance, but the Aussie dollar (FXA) vs. yen (FXY) trade could work as well. This pair has been on the rise for months, but overhead resistance is evident. The MACD indicator has narrowed to potential breakout proportions. Given the weakness of Chinese equities and the point of resistance in the Aussie/yen, impending stimulus measures could again give the needed boost to assets with vested interests in China.

On the bond front, the spread between the Treasury short-dated bills (BIL) and the long-dated bonds (TLT) has reached a short-term tipping point. Room for an upward move is possible, but in the short term a pullback looks probable. The waiting game continues in financial markets, and treasuries as a whole are oversold. A tightening of the spread, due to consolidation/pullback, is an obvious move in the near future.

Turning to the bearish indicator, utility stocks (XLU) have failed to meaningfully break lower vs. the broader market of late. The ratio has been in a general decline, but a convicted break lower would lend strong support to an equities rally. Although a defensive rally is a rally nonetheless, real belief in the economy means less risk aversion.

Although European officials have come out and shown consistent support for the euro project over the past few weeks, markets remain on edge about a solution. Treating an insolvency problem as a liquidity problem is one thing, but refusing to treat the problem is quite different. Spanish (EWP) and Italian (EWI) equities vs. the world market index have each, respectively, had a nice run recently. But more conviction is needed to bring it over the top. Much like the other indicators in this article, Italy and Spain have reached upward resistance. Both of these indicators correlate strongly to U.S. equity markets, and a resolution to their problems is essential in prolonging a bull market.

The last indicator of importance is U.S. financials (XLF) vs. S&P 500 equal weight index (RSP). This ratio has entered into an extreme consolidation the past few months. Both the price action and MACD indicator are oscillating within a very narrow range. The waiting game among various global factors -- ECB, Fed, and China -- have led to financials sitting tight. A decisive move within the macro picture should provide this ratio some direction.

0 Freeport-McMoRan Looks Toward Chinese Stimulus

A few days ago I appeared on the George Jarkesy show and recommended his listeners take a look at Freeport-McMoRan Copper and Gold Inc. (FCX). I intend for this article to be the look they were hoping for. This company trades at the will of its macro environment, thus calling for a macro picture to be painted. Uncertainty has littered the markets recently, so to say I write this article with a long term approach in mind is unfair. I do believe in the impending strength of the company, but a swift exit/profit taking is similarly advised.

The first chart below shows the strength of Chinese Equities vs. the Vanguard World equity index . Strength is a loose term, considering there hasn't been much of it over the past four years. Overall fear of Chinese equity market credibility, as well as the fear of a hard landing, has suppressed much of its strength. However, nearing long term lows, this indicator points toward the need for more stimulus. China has had a quick stimulus trigger recently, so to say more is on the way is not out of the question. Upon doing this, certain assets will catch a bid. Commodities is an area that looks to benefit.

Among the commodity realm, copper and gold have a lot to gain from this decision. The charts below highlight both commodities - inflationary - versus the anti-inflationary 20+ year treasury index. With copper being of major importance to physical growth in China and gold being an overall inflation hedge, both could break out in the near future. They are both in multi-month consolidations, essentially waiting for the macro picture to make its move. Stimulus from China, ECB or the Fed could ignite either ratio higher.

A look into the equity market confirms the current argument. The copper miners equity index has also consolidated versus broader equity markets as well. The MACD oscillator has shown strength over the past few months, and looks to enter bull territory. If the picture plays out as expected, then a break higher is similarly anticipated.

In order to gain exposure to this move, a look into Freeport is a goodbet. Freeport has a lot of exposure to both copper and gold prices, mostly copper. They are weighted about 70% copper mining vs. 30% gold. With the high correlation between copper, China and Freeport, it has obvious trade potential. Again looking into ratios as a good indicator, FCX is on the cusp of bottoming out and potentially leading vs. equity markets . This makes it an overweight candidate, and along with the fundamental picture, gains are a possibility.

Lastly, and without a ratio, we look at FCX alone. Much like the charts above, a consolidation has been present over the past few months. A false break higher occurred over the past few weeks, but more is needed for a legitimate push higher. The move is to buy in near the 35 support zone and set a stop somewhere near the middle of the consolidation pattern. This will limit the losses, yet give potential for a move higher in an inflationary environment. Hope this article was clear, and good luck.

0 Weekend Global Macro: Resistance Approaches Macro Risk Assets

The current rally has been questioned on its validity for weeks now, but the internal indicators have been telling a different story. The gradual decline of the VIX (VXX) has done the opposite of diminish fear in the market. At its current levels, many traders have begun to speculate that a potential deep cliff is possible in equities. This trade is improbable due to the existence of ready central banks. September looks to be the month that reveals the true nature of foreshadowed stimulus. A major drop is likely to stimulate immediate action, most likely in China. They have been quick to the trigger on easing policy lately, and with a low CPI, they look to be up for more stimulus soon. The indicators that are presented in this article correlate nicely with the VIX, and show potential for a strong market rally in the future.

The first indicator above is that of the volume for the S&P 500 (SPY) over the past nine months, along with a 50 day moving average. The low volumes are evident, and with such strong moves on low volumes, the markets remain skeptical. This is expected, but the path of least resistance looks to be up for now. As long as there aren't any negative catalysts in the near future, the markets should continue a melt up.

The markets (RSP) have outperformed 20+ year treasuries (TLT) recently, which is a bullish indicator. The outbreak came in early August and has confirmed equities move as of late. The problem is that we are gradually approaching September, and no hard news has been presented yet. The upward resistance looks to be a suppressor over the next fewtrading weeks, which could limit equity gains till decision day.

The next chart is that of Junk Corporate Debt (JNK) versus Corporate Investment Grade (CORP) . Although both should outperform treasuries in a bull market, junk should outperform all in a truly strong economy. The high positive correlation between this ratio and the move of equities is a testament to its validity. Like earlier indicators, this ratio has been appreciating over the past few months. There looks to be some upside until the point of resistance, but expect for a drastic move, either higher or lower, to come in September.

The two charts above represent Utility (XLU) and Consumer Staples (XLP) stocks versus the broader market. Both of these indicators should show weakness in a strong rally. The fact that both indicators have, and are still on the cusp of a downward breakout is positive for risk assets. With more definitive news, look for both to show convicted breakouts lower.

Angela Merkel reaffirmed Germany's commitment to the Euro on Thursday, which led to further equity rallying. European equity (VGK) has outperformed our market recently which correlates to a move higher in risk assets. With so much tied into the situation with the Euro, any form of strength out of the European Union looks strong for global assets as a whole. This indicator is fast approaching resistance, and further strength in this ratio should correlate with action from European officials.

A more obscure variable, but nonetheless important ratio is that of Emerging Market Debt (EMB) versus US 20+ year Treasuries . As is expected, this ratio has outperformed with other risk assets. Emerging market debt requires the perception of a strong global environment, due to their many exports. With emerging markets recently hitting a wall, look for this indicator to move along with the global picture of further easing, or lack thereof.

As a whole, financial markets do show some semblance of strength. Speculators may be calling for depreciation from the current levels, but the market internals signal that higher moves are capable. All moves are tied to decisions to be made in the future, but a drift higher is likely, especially on the limited volumes seen as of late.

0 Global Macro: Low Volumes Equal Price Exaggeration

A truly macro approach is needed to derive some sense out of the market's action recently. Treasuries have shown great strength even in the face of higher equities; this somewhat compromises the move itself. However, a developing trend is that of 10 year yields (IEF) outpacing US equities (SPY). I use an equal weighted index of equities (RSP) in order to show the true nature of the trend. As seen below, in early August the indicator broke out to the upside. This is very bullish for stocks and hints that a downside barrier has at least been put in place by stimulus speculation. Another way of looking at this is by saying the height of the VIX (VXX) has been capped. Traders seem to believe that even if central banks don't act soon, in the case of a tail risk event, they will act.

A few good indicators to look at to measure market strength are the NYSE breadth indicators. The first one is that of Advance-Decline Volume vs. Total Volume. Volumes have been a huge issue in equities lately for various factors. The awaiting of both ECB and Fed action for late August/early September, and equities reaching 52 week high levels have put a lot of money on the sidelines. The indicator below looks to be pushing for an upward breakout, but a major catalyst must be put in place before the move is credible.

The next indicator is that of strictly Advance-Decline vs. Total ActiveIssues. This removes the volume aspect and shows what the markets are doing with exaggerated oscillations. With less money on the table, prices are free to move in an exaggerated fashion. This seems to be the case here, nonetheless, there seems to be an upside breakout. This looks to be another reiteration of equity strength.

A turn back into the debt market shows the strength of junk corporate bonds (JNK) vs. 10 year notes. The strengthening of the economic climate leads to junk outperformance. As seen below, junk has led in the previous rally and looks to be hitting a point of resistance. This makes sense considering the hold till September. A break higher would be another bullish sign for the markets.

A bear indicator exists when Utilities outperform the broader market. This is not the case currently, considering Utility stocks (XLU) look to be primed for a breakdown. They oscillated through the previous rally with uncertainty. Yet, at a point of consolidation, their breakdown could signal new found strength.

The last chart is that of gold (GLD) vs. corporate debt (CORP). Both are seen to show strength during periods of inflation, such as when central banks stimulate economies. They are somewhat seen as substitutes, but due to the debt properties of corporates, commodities offer a stronger inflationary case. When gold can outperform corporates, it usually signals a developing bullish run for gold and inflation hedged securities. The chart below shows a slight bottoming and even a break above the down trend line. Considering the conviction of belief that either the People's Bank of China, ECB, or Fed will act soon, inflationary expectations make sense. The indicators show growing belief in risk on strength, and to avoid another run up on the side lines, many may jump in on the next catalyst.

0 Equity Strength In The Face Of Traditional Weakness

An interesting development crossing the headlines recently has been the lack of leadership in traditional bullish signals. The indicators in question are Russell 2000 (IWM) vs. Russell 1000 (IWB) and Transports (IYT) vs. Industrials (DIA). The divergence has just recently taken shape within the past year, and points to the fact that we are in a defensive rally. The lack of confidence seen in the markets seems to be a culmination of various factors. First is the volatility created by mishaps and market uncertainty. The presence of competing with and trying to outguess central bank actions has investors on edge, as well as market manipulating factors such as Knight Capital and other sentiment sapping developments. The next theme that has kept investors in defensive sectors is the search for yield. Many of the larger cap stocks offer less volatility, as well as yields unseen in the current low-risk bond markets. The defensive rally has many traders awaiting a cliff, and many others sitting on the sidelines letting gains pass them by.

Above is a five-year chart showing the relative strength of transports and industrials. The divergence is evident, and again, has led to many questioning the move's strength. The idea is that companies that ship should be performing as well, if not better, than the companies that produce. Similarly, the small cap Russell 2000 should outperform the Russell 1000 as a sign of risk tolerance. By putting one's money into riskier small caps, investors are signaling their trust in the economic environment. The chart below shows that too is not the case.

The chart shows again a negative divergence over the past year. This may cause some alarm, as it has already, but in comparison to other indicators, the equities show room for strength. The charts of both Utilities (XLU) and Consumer Staples (XLP) vs. the broader market (SPY) are shown below. As a risk off trade, these pairs should fall in strong markets. They have been oscillating within a range over the extended period of uncertainty within the financial markets, but they look to be breaking out lower in the near future. This may be a signal that ignites money coming off the sidelines, and brings belief to the rally.

The final chart below is a somewhat alarming development within the move higher. It is true that energy stocks (XLE) should lead within a rally, but it is far and away leading this breakout. The rebound off of extremely weak levels and the diminished belief that the global economy would be thrown into a tailspin has aided XLE's move. Geopolitical risk is also somewhat weighted into the move higher. The only other times the pair had shown this much weakness was just before both QE1 and QE2 in 2008 and 2010 respectively. In all, it is not fair to say that an equity rise is leading to a gain in the XLE, so this somewhat compromises the strength. But with a shift from defensive into more cyclical sectors as a whole, sentiment should improve.

0 The World Awaits Stimulus

The current macro trade hinges on the move of central bank stimulation. Markets have become exuberant at the thought of accommodative monetary policy that should support risk assets. The current economic factors that have sustained this belief come in the area of weak inflation data, followed by weak inflation expectations. With Germany also showing weakness in recent economic releases, there could be more proof that a catalyst is in order.

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When monetary policy becomes accommodative, assets such as commodities should show signs of appreciation. The equal weight CRB index (CCI) tracks the very commodities that will benefit from the measures. The above chart shows commodities relative to risk off 10 years (IEF). The initial move higher followed the equities inverse head and shoulders breakout (SPY), and the current upward channel has been in line with the equities move as well.

Along the same logic, gold (GLD) now trades as a risk asset and should also move with equities. After the selloff equities have been able to push higher, yet gold has been in a gridlock with the 10 yr. note throughout the duration. However, the divergence between the price action and the MACD oscillator signals a different story. The oscillator has been trending higher for 3 months and now sits in a bullish range. A breakout higher from the price action should be followed by MACD strength and be further support for an equities rally.

Inflation Indexed bonds (TIP) tend to catch demand in inflationary environments, and have shown strength in the face of current monetary stimulus. The chart above again confirms the equities move higher, and give signs of a move higher in commodities (DBC) across the board. The cross tends to move inverse to the dollar (UUP), so look for dollar weakness in the near future.

A turn to more equity centric measures brings us to the cross of Consumer Staples (XLP) and the broader market (IVV). Consumer Staples littered the headlines during the downturn recently, praised as solid dividend plays and promises of stability in a shaky market. However, with broader strength, a sideways pattern has emerged in the cross. Similarly, the MACD oscillator has shown weakness since mid June. With a downside breakout the SPY should find strength in the current trend.

One of the final measures that will be looked at is the European financial sector (EUFN) compared to global equities (VT). The performance of this cross has spoken volumes in the risk vs. risk off trade recently. With the breakdown of financial institutions in Europe --- most notably in Greece, Ireland, and now Spain --- the political debate has surrounded around its resolve. In the current US rally, European financials have shown a period of consolidation. The path of least resistance has been up for now, yet a break in either direction for this cross will sway the direction of the broader markets over the intermediate term.

The culmination of this article resides in the trade of long Dollar and short Euro (FXE). The trade has been negatively correlated with equities and looks to be showing some weakness as of late. The break higher in May moved alongside a steep fall off for the SPY, but the overall trend looks to be rounding off at an intermediate top. The aggregation of price action and the preceding asset crosses above seem to point to near term weakness in the trade. The price is near a trend line and the MACD oscillator is in negative territory, which hints at a bearish undertone.

With the expectation of low inflation in China signaling further easing, and the BOE favoring easing to interest rate cuts, the environment looks to be shaping up for risk asset appreciation. Along the same, Germany is weakening which may open them up to more accommodative measures, and provide relief to a distressed region. Look to breakouts in the crosses above to signal the next step, but from what looks to be shaping, strength seems probable.