Archive of ‘Daily Report’ category

Daily Report – March 12th, 2013

There is so much momentum that exists in the markets today ($SPX and dollar up, bonds and commodities down) that as Refined Investors our job is not to predict when that momentum will end, but instead have a game plan for when it does. If we zoom out, what is frustrating to a lot of people (unless you have your life savings in an $SPX index fund or you manage people that do) is that this feels like a countertrend rally. It bothers us intellectually when we think one thing, and then the markets move in the other direction.

That is why confirming momentum and managing risk is so important. Bull moves tend to be deliberate and unimpressive, while bear rallies are breathtaking and something to brag about. Everyone loves to catch the impulse move, but in reality the money is made by managing risk during these times and watching from the sidelines, and then accumulating the big gains when the larger trend resumes. Those that are paid to be in the market at all timesĀ (such as mutual fund managers) do not have this luxury, and they must promote their product when it is the flavor of the month and hide from investors during a cyclical or secular bear market in their asset class.

As Refined Investors, we have the luxury of rotating asset classes based on fundamentals and money flows. However, if we are not careful then we can get run over by a stampeding cyclical bull move even if we are correctly positioned overall for a secular bull move. Even if we manage to protect our respective portfolios during a countertrend move, a lot of times the biggest damage is done to our mental capital (the control center sitting on top of our torsos) and we are unable to either commit to the secular bull when it finally resumes or hang on for the full 8 second ride.

We are beginning to see hints of a rotation to other asset classes, but we must remain patient to let the moves develop. Momentum does not die quickly, and nobody rings a bell when it is finally exhausted. We can severely damage our portfolios by frontrunning a top or bottom, and we must continue to be patient as sentiment grows stronger in both directions. At some point, one side of the trade gets too overextended and the market shifts, allowing money to be made in the opposite direction. Until then, manage your risk and position sizes, and let the momentum come to you.

We continue to hold our main long positions in GLD and GDX, and individual potential long entries in SPY, palladium, agriculture, natgas, clean energy, and India have been posted. Keep your expectations the same on every trade, and let the market work for you, not against you.

Good trading all.

Steve Chapman, TRI

The Grapes Of Wrath

In John Steinbeck’s classic 1939 depression-era novel, the Joad family is displaced from their Oklahoma home because of the drought, poor economy, and changing financial landscape. Tenant farming is no longer viable, and the bank has foreclosed on their farm. Handbills promise of financial opportunities in California, and many people reluctantly pack up their families and head west in search of prosperity. To Steinbeck, the economic system was impoverishing many to the benefit of those at the top. The Joads faced tragedy and loss on their journey, and upon arrival end up in a situation no better than before.

In today’s Great Recession economy, the baby-boomers are displaced from the comfort of their bond portfolios because of ultra-low interest rates, high unemployment, and the changing financial landscape. Living on a fixed income is no longer viable, and the bank has foreclosed on their homes. Brokers promise financial opportunities in the stock market, and many people reluctantly hand over their nest eggs in search of prosperity. To many, the economic system is punishing savers to the benefit of those at the top. The boomers endure rising taxes and losses to their net worth, and in the end, feel no better off than before.

I don’t have a personal opinion on Steinbeck’s work, but I’m very interested in how cycles in the stock market rhyme with each other, especially in the years after a major equities meltdown. The similarities between the plight of the Joads family and what many investors are experiencing today are unmistakeable, and they both conclude in a departure from everything they have traditionally known…it also provided a nice title for my commodities-related post.

In the meantime, the $VIX is busy pricing in the next millennium of harp playing and grape eating for everyone else. XIV was the big winner as usual, and volume was almost non-existent, possibly in observance of the Spring Break holiday. The dollar formed a swing high, and there are some early signs of money flows into some commodities. While the $CCI (GCC) is still in a confirmed downtrend of lower highs and lower lows, individual names such as sugar, corn, coffee, and natural gas are showing relative strength. Keep watching for momentum to build in these areas, especially if the dollar shows any signs of weakness going forward.

Our mean-reversion positions in GLD and GDX continue to resist further selling, and we would like to add positions in palladium, agriculture, natural gas, and clean energy now that momentum is confirmed. We will look to add SPPP for palladium/platinum (always check the NAV premium on a Sprott closed-fund before buying), RJA for agriculture (if you prefer not to purchase an ETN, then pass on this one, but DBA is not confirming yet), FCG for natural gas, and PBW for clean energy. All of these ETFs are confirming momentum and have realistic entry points. Refined Investor subscribers know where we place our exit points and how we determine position size before we enter any trade, so keep risk management as your top priority. We will also keep our eye on silver to see if it can generate additional momentum, because unlike GLD and GDX, a mean-reversion signal was never generated.


March 11th SPPP Daily


March 11th RJA Daily


March 11th FCG Daily


March 11th PBW Daily


We have OPEX on Friday and then a Federal Reserve meeting next week, so stay patient and continue to watch these markets develop momentum. For those in the SPY long trade, moving your stops up above the gap from last Tuesday at 153.64 will capture some more of your gains while minimizing risk.

Good trading all.

Steve Chapman, TRI

Appetite For _ _ _ _ _ tion

If you’re looking at the blanks in the title…no, I’m not talking about the Guns ‘n Roses album. I would need two more letters for that, and there is no way that this report can do justice to the highest-selling debut album of all time. If you want to jam with me on some Marshall Silver Jubilees though, that is an entirely different topic for another time.

What I am referring to is the pricing of commodities, and the market’s general lack of appetite for them at moment. There are plenty of theories floating around the Internet for why commodities have underperformed, and any combination of them could be true, but as Refined Investors all we care about is price action. We do not buy assets that are in downtrends, and unless we are shorting them we will continue to keep a watchful eye on their wanderings. Here’s an updated chart on the $CRB and $SPX:

March 7th CRB SPX

Coming out of the 2009 lows, commodities and equities moved in lockstep, reflecting the growth that was happening in the real economy and the effects of QE1 and QE2. However, at the end of 2011 a large divergence began to form between the two (in the equal-weighted $CCI as well). As of today, the $SPX has continued to rise in its now extended 4-year cycle, while commodities look like they have succumbed to the reality of increased supply, decreased demand, and/or changing habits among consumers. The poster child of the 2000′s consumption economy, the Hummer, is no longer in production, and let’s face it – a Prius just doesn’t look the same with 24″ spinners.

But the bigger chess move was the change in policy approach from the Federal Reserve in September of 2011. “Operation Twist” represented a sterilized version of Quantitative Easing, and no longer was the Fed buying agency mortgage-backed securities and agency debt outright, but it was buying treasuries on the long end and selling them in equal amounts on the short end. This was not inflationary by itself, but it gave consumers the incentive to either invest in housing at all-time low rates or search for yield in dividend stocks and junk bonds. Just one look at the homebuilders chart below and we can immediately see the dramatic effect of the Fed’s policy:

March 7th XHB

It also represented a dramatic shift in investor preferences. Consumers living on fixed-income were, for lack of a better term, “smoked out” of the comfort of their bond portfolios in order to maintain their same standard of living and cash flows. Dividend stocks and junk bonds became the new treasuries because of their yield, and ironically, treasuries became the new growth stocks because the only reason to own them was to front-run the Federal Reserve’s purchases, regardless of their yield. The thirst for junk bonds benefits the corporations that traditionally would have difficulty selling debt, and as long as that feedback loop continues it will benefit the stock market. Commodities do not generate a yield and are volatile, and so far they haven’t been a beneficiary of this game of musical chairs. For all intents and purposes, what we have experienced is a true “twist” of the traditional roles of assets in the marketplace.

Nobody can predict the future, but at this point, we have come to an interesting dilemma with regards to equities. Markets eventually top on euphoria and a lack of buyers. This process does not happen overnight, but the longer it takes the more leveraged and complacent the market must become in order to generate the same gains as before at now higher valuations. Without real wealth creation in the underlying economy supporting the market at all-time highs, the only thing that the nominal numbers tell us is that the collective portfolios of investors have simply been redistributed from the larger bond market to the smaller stock market, with the Fed filling the gap left behind. The older generations are now sitting in investments that they typically have shunned as too risky, the Fed is buying the majority of treasuries, and volatility is at multiyear lows. That is the status quo, and right now there are very little catalysts or outlets for a makeover.

Referring back to our first chart, we now have to ask the question:

If investors have nowhere to go at this point, are we more likely to see bigger gains going forward in equities or in commodities?

To be honest, I don’t have the answer. To predict whether we are going to experience _ _ _ _ _ tion or _ _ _ _ _ tion over the short-term is a fool’s errand, and it definitely has humbled the commodities bulls for the last 15 months. Ultimately, at some point the true demand being generated from the underlying economy will make the decision for us. At that time we will either see commodities rise in response or equities fall in reaction and we will position ourselves accordingly to the changes in price across all markets. Until then, we must patiently temper our own personal outlooks and biases and maintain strict risk-management in all of our positions. It is admittedly a frustrating environment to invest in, and unless you receive fees for total assets under management, you probably don’t feel like sending the markets a fruit basket at the end of the year.

There were no large changes in the markets today as everyone awaits the employment report tomorrow. Expect to see significant volatility on the news as there are many narrow range candles and tight consolidations on the charts signifying coiled fractal energy. Honor the stops in our current positions and be ready to look for new ones when the dust settles. PALL made another nice move today and I will be looking for an entry if commodities gain some momentum.

Good trading all.

Steve Chapman, TRI

Daily Report – March 6th, 2013

The $SPX continued to do what a market with momentum does, it moved up on the day. Why did it move up? It doesn’t matter. Did it look pretty? I don’t care. You don’t mess with momentum, and if you choose to do so then you pay for the education…just ask anybody trying to pick a bottom in the mining shares over the last 6 months. It doesn’t mean that buying the $SPX is a good investment right now on a risk/reward basis, just that some things are better left alone or played with smaller position sizes.

Our goal as Refined Investors is always to find the assets that are undervalued or unloved, but ready to move over the intermediate term. We don’t want to be that person that has to make the first putt on the golf course (the value investor), we want to see how it breaks first and then take our stroke with confidence. With that in mind, let’s see what the market is telling us today:


March 6th SPY Daily

SPY continued slightly higher above its Bollinger Bands on weak volume. I really don’t have a comment on this move except that if you want to participate, keep it small and keep moving your stops up. The index is floating on the Federal Reserve’s helium, and nobody knows if we’ll find out at some point that it is really hydrogen instead. Be careful.


March 6th XIV Daily

Volatility futures continue to diverge from the $SPX. XIV benefits from the decay in VXX, and so for this to go down it means that 1 month volatility expectations really are increasing and not just staying neutral. A red flag for equities.


March 6th UUP Daily

The dollar continues to go up, but so do equities. With currency destruction en vogue right now, the dollar might just be the cleaner car in the junk yard. Correlations with other assets are all over the place right now, but if this continues to go higher it might elicit a response from the Federal Reserve. That would be the bigger story.


March 6th GLD Daily

Paper gold is either weak while equities remain at highs, absorbing all of the shorts in preparation for a massive run, or forming a base while waiting for the MA’s to swoop down. We still have an MA Envelopes long trade in GLD in effect, and last May the reversion to the 50 MA happened in an impressive one-day $60 jump. I am not predicting that will happen again, but with the commercials likely at 100 BLEES in the futures market right now and sentiment at multiyear lows, nothing would surprise me at this point. Our stop is below the Feb. 20th lows for risk-management purposes.


March 6th GDX Daily

The miners finally grabbed headlines today for going in the other direction, and we hope that they weren’t just pulling a Forrest Gump and forgetting which end zone to run to. The MA Envelopes were hit for the second time, and once again it sparked a bounce. I posted an intraday update on the move, and this is something we definitely want to participate in. For those that didn’t get in today, get a position tomorrow and position size accordingly with a stop under today’s lows. The target is the 50 MA, which currently is sloping strongly downward, and we can expect to have some Atlanta Braves chop to get through at the 20 MA. When I talk about trades that have the chance to make huge intermediate-term moves (as opposed to the $SPX for example), this is what I mean. It took a lot of risk management to get to this point, but the reward could be massive. However, approach every trade with the same expectation, and look down before you look up. Know how much risk you’re taking on, and take an appropriate position size. Be prepared to bail if once again the price action does not confirm the move.


March 6th IBB Daily

The IBB trade has worked out great so far, and the chart had a beautiful setup and breakout. However, price is approaching the MA Envelopes, and any move higher tomorrow will trigger a sell signal. Take your profits and see if a retest of the breakout level happens. We will enter the trade again on a successful retest.


March 6th PALL Daily

Palladium, unlike its precious metals brethren, has made a nice breakout and performed a retest of the breakout level. The 50 Week MA is sloping upwards, the 50 Day MA is sloping upwards, and as soon as price breaks above the 20 MA we will likely take a position in the metal. Keep watching this one tomorrow.


March 6th PBW Daily March 6th PBW Daily Zoomed Out

PBW has now formed a multiyear rounded base, and after collapsing on no volume (more like disinterest) it has broken above resistance and retested the former highs on very large volume. The 50 Week MA is flattening out, the 50 MA is sloping upward, and price jumped above the 20 MA today. Keep an eye on this one, with a little more momentum it could form a very nice trending move.

Overall, we are long GLD, long GDX, long IBB, and watching PALL and PBW. Those that are brave can take a small position in SPY (have I said keep it small), but keep your risk low. We might be seeing a change of character in the market soon, as it appears that stocks could stagnate and the inflation trade could reappear at some point.

Good trading all.

Steve Chapman, TRI

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