A Ship of Fools Crashes into the Alps

Weekly Summary

A Ship of Fools Crashes into the Alps
The first one on shore was Steve Mnuchin, who immediately strutted into the middle of the Davos globalization kumbaya and detonated his anti-trade-dollar-destroying suicide vest. The already-hobbled dollar predictably went into cardiac arrest, to the great surprise of the moron that caused it. How much incompetence does it take to not know that saying “a weak dollar is good for trade”, at an international trade conference, would be suicidal? The same level of incompetence that sends a ship of fools to deliver an ‘America first’, anti-trade message to a room full of the richest global trade entities in existence, just days after slapping anti-trade tariffs on washing-machines and solar panels. The rest of the time in Switzerland was employed trying to pick up the pieces of the shredded dollar (and Mnuchin’s dignity).

Mario Draghi, it turns out , was not amused (see here). The EU economy has been strengthening and talk of reducing QE and raising rates had already pushed the Euro higher, which itself makes any hawkish policy harder to implement because of the upward spiral effect on the currency. And a higher Euro would make the German economic engine less competitive. Mnuchin’s weak dollar statement is exactly what Draghi didn’t need.

Japan is in a similar situation, although they weren’t as pointed in their response as the Europeans, the effect on the Yen was just as violent.

As a species, we are in the process of transitioning into being a ‘global tribe’, especially the Northern Hemisphere, mainly thanks to communication and data processing technologies. Yet, we have the clown-in-chief running around trying to build walls of all kinds when it comes to trading with our friends (but not Putin. When it comes to the Russians, the Donald seems to spread his own cheeks in anticipation). America first, will end up being America alone. Look at what he has done to the TPP, the climate agreement, and NAFTA.

The stock market, for its part, made new highs demonstrating its belief that Central Banks are now even more likely to continue providing a safety net; no need to waste money on hedging when the CBs are providing a free put!


Equities

Sentiment
The AAII investor bullish sentiment dropped back below the 50% mark to finish at 45.5%, while the bearish sentiment rose 2.6%, remaining below 30% at 24% (chart below).

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The NAAIM index 50 MA continues to roll-over while the SPX charges higher. Like the AAII counter-trend pattern, this negative correlation is also similar to what preceded the 2015 double-dip correction (red arrows below). The fact that the market has refused to correct a healthy 3–5%, could mean that in the near future the correlation will revert to the mean with a more substantial 10–15% correction in the S&P 500, like it did in 2015 (chart below).

The put:call ratio has flattened and is neutral at this point (chart below).

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The Rydex Bear:Bull asset ratio continues to maintain historically low levels (chart below).

Technical
The long-term technical averages continue to demonstrate a late-stage bull market and no warning signs are evident. The 8-month moving average falling below the 12-month moving average would be a long-term bear signal. The ADX trend (black line) continues to move closer to the down-sloping major trend (blue dashed line on chart below), and the bullish and bearish momentum (green and red lines, respectively) are both at extreme levels which could facilitate a correction (chart below).

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Fundamentals

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Fundamentally, we continue in a secular bull market where interest rates, GAAP earnings (a new high) and industrial production are rising, while the unemployment rate is falling. It is notable that the Fed funds rate has displayed a declining topping pattern over the last 35-years (pink trend line on chart below). Accordingly, it looks like this hiking cycle could max-out around the 2.0% level for the Fed funds rate late in 2018, which would align with the timing of the next recession derived from the 10-y minus 2-y chart (chart below).

Oil

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Despite this week’s rise in the price of oil, the futures traders positioning continues to be a red flag for the oil price. The commitments of oil futures traders increased further their all-time extreme levels; The swap dealers (the true experts in this market) added another 10k contracts to their net short position for an outrageous 663k contracts, while the speculators (you know, the guys with suspenders that play with other people’s money), reduced their net long position slightly to 478k contracts. The managed money (other people’s money) are usually wrong at the pivot points, while the swap dealers are usually correct. The swap dealers are obviously expecting to buy back the oil at lower prices in the future (March).

Gold

Gold has been trading as an inverse currency trade with the dollar (dollar down, gold up), but it has continued to exhibit fairly-odd behavior when it comes to its other correlated markets.

Normally, gold has a strong positive correlation with TIP (the Treasury Inflation Protected Securities etf), but lately gold has diverged from TIP. The last time it did this was in mid-2016, shortly before it dropped $200 (chart below).

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Gold and Treasury interest rates normally trade with a negative correlation, but since the beginning of December, rates and gold have traded up together. This positive correlation will eventually have to revert to the mean, however, the collapse of the dollar is the only thing that gold is listening to at the moment. The lower dollar makes it increasingly likely that the Fed will continue to raise rates, and only a matter of time before the dollar turns up and gold turns down (chart below).

Technically, gold is still over-bought on the RSI and stochastic, the MACD is looking to roll-over into a bear cross-over, and the ADX bull momentum is over-extended. Gold broke above $1355 (recent high), but it dropped back to finish at $1352 which leaves it open to a breakdown in price. (chart below)

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Regards,

ANG Traders

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Forty years of private equity trading, and still learning.