Global Macro Update

Chart 1: Overbought and oversold global macro asset classes

Source: Short Side of Long

• Equity indices continue to dominate the overbought technical levels. In particular, United States and Japanese equities have performed well as central banks in these two countries have done the most monetization (both countries are extremely indebted). Mexican equities, on the other hand, have been falling rather rapidly in recent weeks, which could signal that the overvaluation in this region is about to enter a corrective mode. Commodities also continue to remain out of favour with investors, who do not see inflation as a threat nor expect interest rates to rise anytime soon. As expressed in the weekend post and in the recent SSOL newsletter issue 5, commodity sentiment remains extremely depressed. Finally, precious metals and foreign currencies are the most oversold assets globally. Interestingly, the poster boy of Asian boom and global risk taking - the Australian Dollar - has seen its technical RSI level fall below 30 this week.

Chart 2: US equities best performing asset class for the cycle

Source: Short Side of Long

• Recent vertical rise in the S&P has made the US equities best performing major asset class for the investment cycle. Equity returns since the beginning of 2009 have now exceeded 100% including dividends, with returns even higher for those who both the March 2009 lows. During the initial stages of the recovery cycle, Emerging Market equities held the leadership role, which was eventually passed to Gold in the later parts of 2011. Corporate bonds continue to outperform government bonds in a nice and progressive manner, with less volatility. However, it is also worth noting that since the beginning of 2007, long dated government bonds have outperformed every other asset class, apart from Gold (chart here). In my opinion, this makes the bond market extremely unattractive as a long term investment.

Chart 3: With US equities dominating, Gold is in a bear market

Source: Short Side of Long

• The recent talk of precious metals manipulation is complete non sense, in my opinion. Large number of investors cannot understand why Gold is falling while central banks continue to devalue currencies and monetize debt. My answer is quite simple: Gold has to correct before it can resume its bull market. They were too many bulls expecting Gold to go parabolic. Looking at the chart above, Gold has not experienced a 20% annualised correction since the beginning of its secular bull market. This is extremely rare and very unusual according to my own historical research of market price action. 

• Let us consider the fact that during the panic of 2008, global equities, commodities and corporate bonds sold of pretty hard. Gold ended up finishing positive for the year. During the initial recovery phase in 2009, government bonds also experienced a strong sell off. This was followed by a 2011 bear market in world equities ex-USA (chart here). Commodities were also hit very hard too, apart from Gold. It refused to correct by even 20%. However, eventually the asset did break down below the $1,530 per ounce. I believe this to be a healthy correction for the bull market to resume. Therefore, Golds correction shouldn't be "why puzzle" nor a "manipulation blame". The asset was overdue for a correction and will most likely keep correcting for a few more weeks, months or even quarters. The quicker any asset with strong fundamentals can shake weak heads and over-leveraged players, the quicker the rally can resume. 

• Finally, it should be noted with very high caution, that US equities remain the only major asset class not experience a bear market or an annualised negative performance during the current investment cycle. This too is also very rare. As a matter of fact, the last time US equities posted even a -1% annualised total return was back in middle of 2009, almost five years ago. This asset class now presents most risk to long term investors. My advice is for one not to chase rising markets, instead one should invest in oversold assets with improving fundamentals.

Portfolio Update: Purchased Silver

It has been awhile since I've done one of these. The turmoil in the Precious Metals sector continues, with the sell off pushing the price of Gold towards retesting the recent crash low. At the same time, Silver and Gold Miners made lower lows. 

Many regular readers of the blog know that I have been investing in Silver for a long time and in recent quarters, I have been updating my purchases in "real time" via the blog. Moreover, as many already know, Silver remains by and large my biggest holding, with over 90% of my fund's NAV in the precious metal. Everything else I hold is just minuscule trades in comparison, so one would not be wrong in saying that my financial performance is solely and directly linked to this extremely volatile  precious metal.

Chart 1: During Asian trade Silver retested $20 support

Source: Barchart (edited by Short Side of Long)

On April 15th, I posted a few charts during the Precious Metals panic (link here). I wrote that traders and investors should: 

"...let the selling exhaust itself in the coming days or weeks and buy the final panic low."

Many investors have asked me "what does the panic low look like..." and "...how does one know it has happened?" Well, in short nobody ever knows anything for sure. Personally, I know even less than all the gurus out there who call bottoms and tops everyday of the week on various asset classes. Timing is a difficult thing for us mortals.

Having said that, I felt that we saw a panic low, as Silver retested its long term support resistance line around $20. During the Asian morning trade (yesterday), we saw Silver fall almost 8% from already extreme extreme bearish sentiment readings and technically oversold conditions (I'm not going to bore you with all the indicators again, because you have seen them on this blog and many other sites for weeks now). 

However, as the trading day continued into Europe and US timezones, we saw bears lose control to bulls in a possible sign of capitulation and selling exhaustion. Powerful reversals and outside day candles, huge tails and hammers, were witness throughout the whole sector.

I sent out an email to many of the traders I stay in communication with, telling them know I have started buying again... for the first time since July 2012 (link here) and December 2011 (link here). I bought my third major position during this cyclical bear market, which has now lasted for over 2 years when it comes to Silver.  

Long term outlook remains the same. I still continue to believe that Silver will eventually recover back to $35 and then towards its major resistance at $50. It might takes months and quarters for this to occur. Furthermore, down the track, I believe that the metal will go on to make all time new highs above $50 per ounce. That is when the real gains will start!

Weekend Sentiment Summary (May Week 3)

Equities

Chart 1: VIX & S&P 500 divergence continues...

Source: Short Side of Long

• While not an outright sentiment indicator, Volatility Index (VIX) usually tends to lead the S&P 500 lower. Red divergence lines, in the chart above, show how VIX refuses to make a lower low while the stock market moves higher. Disagreement tends to be a warning signal majority of the time (doesn't always work). It seems that traders tend to buy protection in anticipation of an up-and-coming corrections. This is definitely a warning signal, which we've seen time and time again, throughout the current bull market.

Chart 2: Investors not enthusiastic about the parabolic rally?

Source: Short Side of Long

• This weeks AAII survey levels came in at 38.5% bulls and 29% bears. Bullish and bearish readings pretty much stayed the same from the prior weeks level. As already commented in previous sentiment posts, AAII sentiment levels remain below average, despite a parabolic rise in stock prices. However, this is not so rare. During a powerful stock rally in late 2006 and into early 2007, AAII sentiment was falling just as the market was peaking. In general, this indicator is much much better at predicting intermediate bottoms.

• Investor Intelligence survey levels came in at 54% bulls and 20% bears. Bullish readings rose by 2%, while bearish readings stayed exactly the same. Bull ratio remains on a "sell signal" and has now exceeded 73%, which is the highest level since the major market top in 2011. For referencing, the bull ratio chart can be seen by viewing the sentiment post from two weeks ago or by clicking clicking here.

• NAAIM survey levels came in at 84% net long exposure, while the intensity came in at 164%. Net long exposure remains near some of the highest levels since the surveys inception, but so far the sell signal has not worked. Stocks remain in their parabolic run up. Recent NAAIM sentiment chart can be seen by clicking here.

Chart 3: Market Vane optimism is now at the highest in 6 years

Source: Short Side of Long

• Other sentiment surveys continue to signal extremely overbought market conditions. Consensus Inc survey remains at extremely elevated level associated with previous market tops. Market Vane survey, seen in the chart above, rose to a reading of 70% bulls for the first time in 6 years. The chart shows all of the instances when bullish sentiment became elevated (65% bulls or more). Interestingly, while the rally sometimes lasted for a few more weeks or months, all of the gains were eventually given back. Hulbert Newsletter Stock surveys has now risen to 70% net long exposure - also the highest level in more than 6 years. Furthermore, Hulbert Newsletter Nasdaq Stock Index remains at extremely high levels last seen 13 years ago during the tech mania. Last weeks chart of the can be seen by clicking here.

Chart 4: Nova Ursa fund flows remain at overly bullish levels

Source: Short Side of Long

• This weeks ICI fund flows report showed equity funds had estimated inflows of $3.46 billion for the week, compared to estimated outflows of $4.41 billion in the previous week. Recent ICI equity fund flow chart can be seen by clicking here. Sending out a very similar message is the Rydex fund flows tracked via Nova Ursa funds, seen in the chart above. Leave of capital entering bullish funds by and large outnumbers the capital entering bearish funds. The two month average has also risen and remained at elevated levels, while the S&P continues its parabolic rise.

Chart 5: Hedge funds bullish bets on tech stocks is persistent

Source: Short Side of Long

• Latest commitment of traders report showed that hedge funds and other speculators continue to hold an extremely high net long position on technology stocks. This weeks contract position came in at over 130 thousand net longs for the third week running. We are not too far of from record levels of net long exposure.

Chart 6: Retail investors are jumping into call options

Source: SentimenTrader

• Retail investor option positioning, tracked by equity only options, is showing extreme signs of call purchasing. Usually, but not always, this results in some type of a short term pullback. However, it needs to be said that option data is quite volatile, so the signals it gives out aren't always perfect. Furthermore, large number of put purchases do a better job at signalling a bottom than a large number of call purchases when it comes to calling tops.

Bonds

• Bond sentiment surveys remain around neutral territory. Both the Consensus Inc survey and Market Vane survey still remain dead smack in the middle of the bull vs bear percentage readings. Hulbert Newsletter Bond survey is closer to extremely high net long exposure levels. Last weeks chart can be seen by clicking here. All in all, sentiment surveys do not give much to a contrarian trader, but as already stated on many occasions, for the long term investor - this asset class remains extremely overvalued after a 31 year bull market.

Chart 7: Small specs have started shorting Treasuries again...

Source: Short Side of Long

• Recent commitment of traders report shows that after a short squeeze rally, which occurred over the last month or so, small speculators (also referred to as dumb money) have once again turned negative on the Treasury Long Bond. These traders have now initiated short bets in excess of 20,000 contracts. Having said, it is important to understand that net short positions could resume while the price sell offs, the same way that net long positions persisted since February 2011 low. Technical traders are also looking at the recent failed rally as a first lower high in two and half years.

Commodities

Chart 8: Funds are holding extremely low commodity exposure

Source: Short Side of Long

• Latest commodity commitment of traders report showed that hedge funds and other speculators continue to hold extremely low exposure towards commodities for the third week in the row. For the fourth week in the row, hedge fund net long contracts on commodities remain around 345,000. Short positions are held on commodities such as Copper, Sugar, Wheat and in particular Heating Oil. The chart below shows record net short positions:

Chart 9: Traders have become extremely negative on Energy

Source: Short Side of Long

• Commodity Public Opinion surveys have rebounded from extremes in recent weeks. Having said that, industrial commodities like Heating Oil (energy) and Copper (metals) are still quite disliked amongst investors. 

Currencies

Chart 10: Hedge funds increase their bets on the US Dollar

Source: Short Side of Long

• Latest currency commitment of traders exposure towards the US Dollar continues to increase on the net long side. Cumulative Dollar positioning stands at over $30 billion for only the fifth week over the last decade and half. Other four weeks occurred around June 2012, as the EU Crisis was in full swing. Largest bullish bets on the Dollar are against currencies such as Japanese Yen, British Pound, European Euro and Canadian Dollar. Traders are now short every single major G-10 currency in the Trade Weighted Dollar Index, apart from the Kiwi Dollar.

• Currency Public Opinion survey readings on the US Dollar are staying near some of the highest levels of optimism. As explained in previous weeks, this has mainly been a result of ongoing pessimism towards the European Euro and the Japanese Yen.

Chart 11: Bullish bets on Gold by hedge funds continue to fall

Source: Short Side of Long

• Alternative currency commitment of traders report showed hedge funds and other speculators continuing to cut their net long contracts even further. In Gold, non commercial positions have now fallen below 84 thousand, while small speculators are in total panic with lowest net long exposure since 2001. Positioning in Silver was also decreased too. Hedge funds hold just over 10,000 net long positions. Last weeks chart can be seen by clicking here.

• Public opinion on alternative currencies like Gold and Silver is still around depressed and extreme pessimism levels associated with previous intermediate bottoms. With the recent sell off in price, we are sure to see even less bulls in coming updates.

Interesting Documentary: The Global Financial Collapse

"Meltdown is a four part investigation into a world of greed and recklessness that brought down the financial world. The show begins with the 2008 crash that pushed 30 million people into unemployment, brought countries to the edge of insolvency and turned the clock back to 1929.

Doc Zone has traveled the world - from Wall Street to Dubai to China - to investigate The Secret History of the Global Financial Collapse. Meltdown is the story of the bankers who crashed the world, the leaders who struggled to save it and the ordinary families who got crushed."

Episode One: The Men Who Crashed The World

Source: YouTube

Episode Two: The Global Tsunami

Source: YouTube

Episode Three: Paying the Price

Source: YouTube

Episode Four: After the Fall

Source: YouTube

Weekend Sentiment Summary (May Week 2)

I was hoping to put this post up a bit earlier, however the allure of NBA play off finals has kept me at bay. The current type of powerful rally is very healthy when seen post major market lows, like in 2003 and 2009. Market tends to rally hard out of extremely oversold and overly pessimistic conditions as it mean reverts to equilibrium (if there is ever such a thing with human emotions involved).

However, the market has entered a blow off terminal phase of the bull market. The Federal Reserve is now fully aware that they have created yet another bubble. There have been only a handful of rallies with similar vertical gradient over the last two decades, mainly during the tech bubble euphoria of the late 1990s. During periods like these, sentiment becomes almost irrelevant. It doesn't matter really what indicator says what... until one day it does.

On the other side of the spectrum, precious metals bearish sentiment is on a record breaking run. Week after week, we see either lower sentiment surveys or lower positioning via the COT report (especially link to the small speculator space).

Equities

• This weeks AAII survey levels came in at 41% bulls and 27% bears. Bullish readings rose rapidly by almost 10%, while bearish readings fell by 8.5%. With the market rising vertically in recent months, AAII sentiment levels of retail investors have remained decently subdued. While bulls believe this is a sign of even higher prices to come, majority of the other sentiment surveys discussed below do not confirm AAII's message.

Chart 1: Bears are non existent in the advisor community

Source: Short Side of Long

• Investor Intelligence survey levels came in at 52% bulls and 20% bears. Bullish readings rose by 4%, while bearish readings rose by 1%. Raw bullish readings are not yet at extreme levels, however the survey continues to display a non existence in bearish sentiment. While not always perfect, perviously low levels (especially when prolonged) have been signs of intermediate market peaks. Finally, survey's bull ratio, displayed in the chart above, remains in complacency zone (sell signal). Last weeks chart can be seen by clicking here.

• NAAIM survey levels came in at 79% net long exposure, while the intensity came in at 40%. As already reported last week, net long exposure has averaged at the highest level since the surveys inception. Last weeks chart can be seen by clicking here.

Chart 2: Hulbert's Nasdaq sentiment is reflecting euphoria

Source: Short Side of Long

• Similar to last weeks update, majority of other sentiment surveys I follow are still signalling overbought market conditions. Consensus Inc survey remains at extremely elevated level associated with previous market tops. Market Vane survey also remains at extremely elevated level of 69%. Intermediate equity market peaks in February 2011, March 2012 and September 2012 were at the same level. Hulbert Newsletter Stock surveys have once again jumped to near record high exposure territory. In particular, Hulbert Newsletter Nasdaq Stock Index is once again back to 94%, as can be seen in the chart above. Previous readings of this magnitude have been associated with "irrational exuberance" peak in the technology, media and telecommunication bubble during the year 2000.

Chart 3: Retail investors flock into stocks at the end of a rally

Source: Short Side of Long

• Earlier in the week ICI did its latest fund flows report. According to the company equity funds had estimated outflows of $4.37 billion for the week, compared to estimated inflows of $1.33 billion in the previous week. Retail investors continue to flock into the equity markets at the fastest quarterly pace since early 2007. It is usually not surprising to see retail community join the buying frenzy at the end of a bull market and after missing all of the last 100% gain out of March 2009 lows. Confirming this data is the Rydex fund flows tracked via Nova Ursa funds, which also continues to show large amount of bullish bets and extremely small amount of bearish bets.

• Latest commitment of traders report showed that hedge funds and other speculators continue to hold an extremely high net long position on technology stocks. This weeks contract position came in at over 130 thousand net longs yet again, which is close to record highs. Last weeks chart can be seen by clicking here.

Chart 4: Total option positioning remains at neutral levels

Source: Index Indicators

• Option positioning, shown in the chart above, sits dead smack in the middle of range for the last three years or more. From a contrarian point of view, a sell off in price and a potential bottom is usually accompanied with large put buying as seen in May 2010, August 2011 and June 2012. However, investor positioning is not always at the other extreme end, when it comes to market peaks. Historical data shows many occurrences where large put buying was present near market peaks, including during February to July 2011 seen in the chart above.

Bonds

Chart 5: Newsletter advisors are very bullish on Treasuries

Source: SentimenTrader

• Bond sentiment surveys are continuing to recover from their recent troughs. Consensus Inc survey has rebounded from extremely pessimistic levels few weeks ago, towards more neutral levels. Market Vane survey is still in the neutral territory. Hulbert Newsletter Bond survey is approaching extremely high optimistic levels, as can be seen in the chart above. All in all, sentiment on Treasuries isn't overly extreme, but the asset class remains extremely overvalued after a 31 year bull market.

Chart 6: Speculators remain quite neutral on Treasuries

Source: Short Side of Long

• Commitment of traders report showed that after several months of holding some of the largest net short positions on Treasuries, small speculators are now positioned more towards the neutral side. If we look at the basic technical analysis of the chart above, we should be able to notice that we are currently posting a first lower high. Has the bond market rally finally peaked? In the recent newsletter posted on last week, I advised those holding bonds not to chase the prices any higher from current levels, as the 31 year secular bull in bonds remains extremely overvalued (I am repeating this important point once again).

Commodities

Chart 7: Hedge funds exposure remains near 2009 lows

Source: Short Side of Long

• Latest commodity commitment of traders report showed that hedge funds and other speculators hold extremely low exposure towards commodities. Investors held over 1.3 million net long contracts in January 2011, with prices peaking in late April 2011. The twenty four month bear market has reduced those positions to some of the lowest levels since Match 2009, currently at 347,000 net long contracts. Note: My own personal Commodity COT Indicator takes into account various commodity positioning from Energy, Agriculture and Metals sector. It only focuses on COT reports which correlate closely to the price and excludes other which do not.

Chart 8: Investors are particularly bearish on Agriculture

Source: Short Side of Long

• Agricultural commitment of traders report continues to show extremely low positioning of 235 thousand contracts. Current level of bullish positioning is usually connected with intermediate and long term bottoms, last seen in October 2008, June 2010 and December 2012. Hedge funds are extremely negative on soft commodities like Sugar and Coffee in particular.

Chart 9: Funds hold exceptionally bearish bets on Copper

Source: Short Side of Long

• Commodity Public Opinion surveys have rebounded from extremes in recent weeks. Neutral sentiment readings can be seen in most energy and agricultural commodities. However, sentiment on Copper remains very depressed. Copper COT positioning, seen in the chart above, definitely confirms depressed Public Opinion sentiment.

Currencies

Chart 10: Hedge funds still hold elevated bets on the greenback

Source: Short Side of Long

• Latest currency commitment of traders figures continue to resemble previous weeks readings. Cumulative Dollar positioning stands at $24 billion, with largest bets on the Dollar against currencies such as Japanese Yen, British Pound and Canadian Dollar. Investors also remain short the European Euro and the Swiss Franc too.

Chart 11: Speculator positioning on the Pound is extremely low

• Currency Public Opinion survey readings on the US Dollar have been extremely optimistic. As explained last week, this has mainly been a result of ongoing pessimism towards the European Euro and the Japanese Yen. Sentiment levels on the Loonie have risen sharply in recent weeks.

Chart 12: Small speculators are extremely negative on Silver

Source: Short Side of Long

• Alternative currency commitment of traders report showed hedge funds and other speculators continue to cut their net long contracts even further then last week. In Gold, non commercial positions have fallen below 90 thousand for the first time since late 2008, while small speculators remain net short for the first time since 2001. Last week I discussed the ever so low small speculator positioning in Silver (chart above). Well, this week it turns out small specs have turned even more bearish, setting a new record low positioning!

• Public opinion on alternative currencies like Gold and Silver continues to remain near extreme pessimism, despite a rebound in price.