Chart Of The Day: Silver’s Bear Is 4 Years Old

Today's chart of the day focuses on the current bear market in Silver. Regular readers of the blog would remember the chart below, which tracks the current sell off (which peaked in late April 2011) against all other major bear markets Silver has been through since 1960s.

Chart Of The Day: Silver has now completed four years of its downtrend

Silver Bear Markets Source: Short Side of Long

 Let us make a few observations:

  • The current bear market is four years old, which means it is the longest downtrend without a substantial rally since Silver officially floated on exchanges in the late 1960s
  • While the 1987 to 1993 bear market was longer, I would like to remind the readers that the actual low was posted in early 1991
  • The current bear market is down 68% from its April 2011, which ranks it as the second worst downtrend (worst being the 1980-82 bursting of the bubble)
  • Furthermore, there has only ever been one bear market where Gold sold off more then 50% and Silver sold off more then 70% (the 1980-82 precious metal crash)

While just about all investors have given up on Gold and Silver, contrary investors should be wondering how much longer and/or lower do these assets need to go, before the final low is in place? That is the million dollar question!

Disclosure: my largest portfolio position is Silver, with an entry that is approximately 60% below its April 2011 highs. This means that currently it is under water, but I will continue to accumulate this asset by averaging down. I have also shorted Silver successfully twice during the current bear market. First time was in August & September 2011 and then once again recently during July 2014.

Chart Of The Day: Australian Dollar Oversold

Second COTD post focuses on another currency, the Australian Dollar. Here, we are looking at the longer term view dating back almost two decades. The Australian Dollar bottomed in early 2000s and marked on a huge bull market, where it doubled against the US Dollar. However, the recent peaked occurred in middle of 2011 at $1.10, and now the Aussie currency has been in a strong downtrend falling all the way back to 75 cents.

Chart Of The Day: Australian Dollar is oversold & at major support level

Australian Dollar vs 200 MA Source: Short Side of Long

The chart shows that the currency has found some kind of a support at a long term trend-line dating back to two other major bottoms (2001 and 2009). When we look at the distance away from the 200 day moving average, the recent sell off in the Aussie was very extreme and only second to crash event during Lehman Bankruptcy. If my previous post holds any weight, and the US Dollar Index is correcting, then the oversold Aussie could benefit with some kind of a rebound right here.

Disclosure: I'm keeping my short positions in the AUD however, I have now opened up a new long position as a short term trade as well.

Chart Of The Day: US Dollar To Correct

Today's chart of the day focuses on the US Dollar. The chart below shows the stellar rally greenback has delivered to those who were positioned right several quarters ago. It really has been one of the most impressive rallies for a major currency. The Index rallied from 80 to 100, from middle of 2014 until the first quarter of 2015. The question now is, what's next for the reserve currency?

Chart Of The Day: US Dollar looks weak and could now correct properly

US Dollar vs 50 MA Source: Bar Chart

I have been warning for several weeks now that the US Dollar rally has most likely peaked back in middle of March, during the FOMC press conference. The index was extremely overbought and matched conditions last seen in 1985 Plaza Accord and 2008 Lehman Bankruptcy (both marked major USD tops). The chart above shows that the Dollar has spent over 9 months above the 50 day moving average. However, recent tape suggests that the Dollar might now break below and go through an overdue correction. Keep a close eye on the currency!

Chart Of The Day: Commodity Crash

Today's chart of the day focuses is on long term prices of commodities. The chart below uses CRB Index, but from time to time I also use CCI (Continuous Commodity Index) as well as RICI (Rogers Intentional Commodity Index.

Chart Of The Day: Commodity crash is 2nd worst in almost four decades

CRB Index Performance Source: StockCharts (edited by Short Side of Long)

Throughout the 1980s and 1990s, when commodities moved in a sideways bear market, the annualised losses did not exceed 20% threshold. However, during the Lehman Panic in 2008, prices tumbled by over 50% over a 12 month period. Furthermore, the recent crash in commodity prices on annualised performance basis is down 30% from 12 months ago, which is the second worst price sell off in such a period in almost four decades.

So have commodities found a bottom? The strong support around the 200 level on the CRB Index most likely implies that the answer is yes. However, the question is what kind of a rebound will prices experience? Will it be a V-shaped rebound seen in 2009/10, will it be a basing pattern or will it be yet another sideways secular bear market we saw during 1980s/90s?

Chart Of The Day: Precious Metals Bear Market

Today's chart of the day once again focuses on the precious metals sector, just like the post several days ago. Precious metals have been in a bear market since 2010/11 period, depending on which asset class we are discussing. Let us make a few observations:

  • Gold peaked in early September 2011 and is currently down as much as 41% using intraday peaks and troughs
  • Silver peaked in late April 2011 (not shown in the chart) and is currently down as much as 71% using intraday peaks and troughs
  • Gold Miners peaked in early September 2011 (just like spot Gold) and are currently down as much as 75% using intraday peaks and troughs
  • Junior Gold Miners peaked in early December 2010 (not shown in the chart) and are currently down as much as 88% using intraday peaks and troughs

Chart Of The Day: Performance of PMs & miners during the bear market

Precious Metals Bear Market Source: Short Side of Long

Portfolio Update: Closing China

[Original Post - 09th of April 2015]

I'll update this post properly tomorrow, but I've just recently closed my long positions in FXI and EWA from the newsletter portfolio. In particular, I was concerned by the 5 standard deviation movement in FXI (Chinese H Shares). In short term, the market has just gone completely parabolic. As regular readers might remember, this position was my largest and as big as Silver. It is the biggest win in money terms I have ever executed! I also opened up a very small short position on the DIA ETF (Dow Jones) with a tight stop above $180. Full update coming tomorrow during Asian time...

[Update - 10th of April 2015]

Chart 1: Chinese shares have exploded into a 5 standard deviation move

FXI Chinese Stocks Source: Bar Chart (edited by Short Side of Long)

I've talked about Chinese shares on the investment blog and newsletter for months. Initially, I recommended buying the Chinese H shares during the October correction. Thew newsletter portfolio opened up very large positions in early November and middle of December. In recent days, the price has broken out on the upside in such a dramatic fashion. We can see that the FXI ETF is trading into its 5 standard deviation away from its 50 day mean.

This type of a movement is not sustainable and is extremely rare historically for any asset class. It is very similar in nature to a panic or a crash. Therefore, while I remain bullish on the Chinese stock market in the long term, I have been forced to sell my holdings in the short term. Personally, the gains have been mind blowing and I suspect whenever something goes straight up, it usually suffers a major correction.

Chart 2: The ongoing trading profit and loss of the newsletter portfolio

Newsletter And Blog Portfolio Source: Short Side of Long

I haven't updated the portfolio summary in awhile, so here it is. Major running positions are highlighted. They include short Aussie Dollar / long US Dollar, long Silver (with previous trades which are underwater from 2013/14 not shown) and the recent purchase of EM stocks (click here for link). The rest are small trading bets ranging from 0.3% to 3.0% of NAV. Two major positions (Silver and Chinese/EM equities) were both 40% of NAV prior to yesterdays closing of FXI. Silver now remains the largest bet I have, with EM stocks second largest and a lot of cash on the sidelines.

Final words I will leave you with is that from my own personal perspective, equity markets are very much overvalued in the US. Also, recent price action is parabolic in Japan, Germany and China. These strong movements seem to be based on central bank easing policies, coupled with weak economic growth. Value can be found in Precious Metals and Gold mining stocks, but they do not seem to be at a bottom just yet. Brazilian and Russian equities are also very cheap due to a crash in Oil prices and so are other energy sectors such as Uranium & Coal. However, let us remember that just because something is cheap... doesn't mean it will rally!

Chart Of The Day: Gold Mining Juniors To Rally?

Today's chart of the day focuses on the precious metals sector. Gold mining juniors ETF is down a staggering 88.5% from its all time high in late parts of 2010. After a catastrophic bear market of almost 4 and half years, there is undisputed value in this sector. But, the question is: when is the right time to buy? Two charts in one, show that maybe the time could be right now! *wink*

Chart Of The Day: Both charts show prices at major resistance level... 

GDXJ Daily Source: Bar Chart (edited by Short Side of Long)

Chart Of The Day: ...which could be broken in coming days or weeks!

GDXJ Weekly Source: Bar Chart (edited by Short Side of Long)

A Closer Look: Emerging Markets

Some of the regular readers might remember that Emerging Markets equities have caught my attention for several months now (refer to Chart 1). By and large, the index has been trend-less for a number of years and to be quite precise, it trades at the same level it did in September 2009 (without dividends). Let us also remember that the NBER officially declared end of US recession in June of 2009. So the question is: if the world growth hasn't been contracting (i.e. recession), why are emerging market equities still trading at levels from around six years ago? Let us investigate further.

Chart 1: By and large EM equities have been trend-less for years now

Emerging Markets No Direction Source: Bar Chart

The recovery coming out of the depths of the Global Financial Crisis of 2008 was quite synchronised around the world. We should be able to observe very clearly how all major regions (US, EU, Japan & EMs) had a similar rebound in earnings per share from early 2009 into early parts of 2011 (refer to Chart 2).

However, around middle of 2011 the infamous "risk on / risk off" correlations broke down, catching many traders by surprise. Basically, every equity market or region started to perform based on its own merits and when I say merits, I am talking about ludicrous monetary policies and easy money conditions by central banking geniuses. Some central banks were early in the easing game, while others are playing catch up only now.

Chart 2: EM under-performance is linked to disappointment in earnings 

Emerging Markets Earnings Per Share Source: JP Morgan

If we look at Chart 2 again, we can see that the recent rise in earnings by US and Japanese companies is connected to the Federal Reserve's and Bank of Japan's latest rounds of quantitate easing (started around late 2012). One could assume a similar outcome is to follow in Europe, as EPS growth picks up in coming quarters. Obviously, we have to give our thanks to Mario Draghi, who has finally decided to engage in similar policies to other major central banks.

So whereas developed markets march upwards, as already explained, emerging markets have remained trend-less in nominal terms and therefore under-performed markets such as US by a large margin (refer to Chart 3). The relative underperformance has been rather sharp since late 2010. From a contrarian perspective, could we see a turn around here?

Chart 3: A reason why EM equities have under-performed DM equities

Emerging Stocks vs US Stocks Source: Short Side of Long

It is still to early to say. We have to consider the fact that during late 1990s, in the midst of the Asian Financial Crisis and the Russian Debt Default, emerging markets under performed by an even larger degree. Could this happen again? Of course it could. Markets always tend to overshoot in either direction. As already discussed from Chart 2, EM earnings have been weak for a number of years. So to see any type of relative outperformance, we would have to see an EPS turnaround.

Dr. David Kelly and his the lovely research team over at JP Morgan do a great job illustrating how emerging market economies are still heavily dependant and modelled towards exports. It is exports that drive EM corporate earnings and as export growth remains quite flat or even contracts (refer to both Chart 4 & 5), the earnings outlook could remain disappointing in the near future.

Chart 4: Disappointment in earnings correlates closely to weak exports

Emerging Market Exports vs Earnings Source: JP Morgan

Chart 5: Export weakness has been widespread within the E7 economies

MSCI EM vs E7 Exports Source: Short Side of Long

Averaged over three months, just about all the economies in the so called "Emerging 7" have contracting export growth. Russia and Brazil are feeling the brunt of the pain as commodity prices, and especially Crude Oil, have crashed since summer of 2014. China seems to be the odd duckling, reporting export growth of almost 50% in February, compared to same time last year.

Personally, I find this very hard to believe (I actually find any data published by any government hard to believe anyways). Firstly, Chinese economic leading data measured by steel, cement and electricity consumption is either flat or contracting year over year. In other words, there is barley any growth in these sectors. Secondly, railroad cargo freight is contracting at much worse rate then during the 2008 Global Financial Crisis. Finally, one of China's most important trading partners is South Korea, which is also reporting flat export growth.

Chart 6: South Korean export growth paints much better picture of China  

MSCI EM vs South Korean Export Growth Source: Short Side of Long

So if export growth around the world is flat or even contracting, one would assume that the stock market performance isn't going to be all that good. Hence why emerging market stocks have been such a laggard for so long and remain in a technical triangle pattern of indecision. However, in recent quarters there has been a very strong devaluation of emerging market currencies, which could now start to increase the competitive pricing and therefore boost exports once again (refer to Chart 7), potentially leading to a rebound in earnings as well.

My personal Emerging Market Currency Index is equal weighted in its composition and includes the Brazilian Real, Russian Ruble, Chinese Yuan, Indian Rupee, Indonesia Rupiah, Malaysian Ringgit, Mexican Peso, Turkish Lira, Thai Baht, Polish Zloty, South African Rand, Singapore Dollar, Taiwanese Dollar and Korean Won. Observing the chart below, the Emerging Markets Currency Index has broken down to new lows and is at one of the most oversold conditions in the last two decades.

Chart 7: Falling currencies to increase competitive edge & boost exports

Emerging Market Currencies vs 200 MA Source: Short Side of Long

Chart 8: Historically, crash in EM currencies tends to bottom EM stocks

MSCI EM vs EM Currencies 200 MA Source: Short Side of Long

Now, bare with me for a second. While there are similarities between Chart 7 and 8, in Chart 8 the EM Currency Index was removed and replaced it with the MSCI EM Stock Index while keeping the indicator in red. Basically, I did this to show the readers that whenever Emerging Markets devalued currencies to such a large degree - in other words the US Dollar rallied powerfully - the region gained some kind of competitive edge as export growth eventually picked up. And since markets are a discount mechanism, historically stocks tend to sniff this out very quickly and usually a buying opportunity is at hand.

Chart 9: Dollar sentiment is extremely bullish & might correct for awhile

US Dollar COT Source: Short Side of Long

I should further add that during the recent powerful rally in the US Dollar, majority of the international equity indices under performed, so we should entertain the idea that a correction in the greenback could create a rebound in some of these oversold assets as well. As discussed in the last weeks blog post:

It seems that the major inflection point on the US Dollar Index occurred during last weeks FOMC meeting. Therefore, foreign currencies will now have a chance to regain at least some of the losses suffered in the last 9 months or so. This is true in particular for currencies where hedge funds and other speculators are holding very large short positions (refer to Chart 9). From a contrarian point of view, a short squeeze could now be playing out and rebounds might be swift and rather powerful, catching many of guard.

If the Dollar is finally ready to correction for awhile, then maybe some of the global fund managers might opt to relocate their capital towards the unloved Emerging Market equities.

Chart 10: Simultaneously, fund managers have given up on EM stocks

Merrill Lynch Fund Managers EM Weighting Source: Short Side of Long

Chart 11: Data shows global managers hold relatively high cash levels

Merrill Lynch Fund Managers Cash Balance Source: Short Side of Long

According to the recent Merrill Lynch monthly survey, which tracks exposure and opinions of over one hundred professionals with close to a trillion dollars in exposure, global money managers are by and large very much underweight Emerging Market equities (refer to Chart 10). As the same time, they have also built up quite a high cash buffer, sitting at 4.6% (refer to Chart 11).

Historically, the survey data has shown that both of these indicators at current levels, have produced very reliable buy signals. While there are no guarantees that this time will lead to yet another rally, the contrarian in me isn't surprised to see Chinese shares breaking out in recent months (keep in mind that China is the largest weighting in the EM complex).

Chart 12 & 13: EM & Asian stocks valuations are attractive relative to US

Emerging Markets Price to BookEmerging Asia Price to Book  Source: JP Morgan

Fund managers might also look at valuations and see that Emerging Markets, and in particular Asian equities, are quite cheap (refer to Chart 12 & 13). This is true in nominal and especially in relative terms. Price to book readings in the overall EM complex sits at 1.5 times, which is close to 1 standard deviation below its mean. Asian equities are even cheaper still. Surprisingly, the current valuation level have been sitting there for years, without inciting capital to bid up prices and without producing a sustained rally.

Therefore, I admit that valuations could become even cheaper, leading to a grossly undervalued price to book levels we saw during 1998, 2001 and 2009 periods. In this case scenario US Dollar would continue to rise (after a brief pause), pushing the Emerging economies into a sharp export contraction and an even more dramatic fall in earnings per share.

Basically, the case scenario I am painting here is one of a global recession and a repricing of EM stocks towards book value (or even lower). From the technical perspective, the price would break lower in the current triangle setup (refer to Charts 5, 6, 10 & 11).

Chart 14: At current valuations, positive returns occur 85% of the time

Emerging Market Expected Returns Source: JP Morgan

These risks are real and should be monitored by paying close attention to the price. Having said that, JP Morgan concludes that at the current price to book value, the average annual return for Emerging Market equities is around 10%, being positive 85% of the time (observe Chart 14). These aren't bad odds to be quite honest and personally I have already started buying the index (I already own China from November of last year).

My risk control is quite basic for both investments, so in case EM stocks do breakdown and suffer a major meltdown some bears are predicting, I am executing the trade with a very tight stop loss. My trigger is set below the triangle support pattern seen in many charts above. On the EEM ETF, the stop loss would be a price close below $38 per share (refer to Chart 1 again).

Chart Of The Day: Are Global Managers Too Bullish?

Today's chart of the day focus is on sentiment. Merrill Lynch publishes a monthly survey, tracking exposure and opinions of over one hundred professional money managers with close to a trillion dollars in exposure.

Chart Of The Day: Fund managers exposure to global stocks is very high

Merrill Lynch Fund Managers Equity Weightings Source: Short Side of Long

The data in the chart is recorded since inception of the survey and goes back to early 2000s. It is compared to the S&P 500 (US stock market index). Readers should be able to make quite a few observations. Here are some of mine:

  • Majority of the time, but not always, extreme readings on either end are contrarian
  • Great buying opportunities occur when managers become underweight equities
  • Extremely bullish exposure isn't always a selling opportunity, but can signal corrections
  • Last major buying opportunity occurred during May / June 2012 correction
  • Bullish overweight exposure of 30% or more has persisted for many quarters now
  • Current readings are above 1 standard deviation from the mean or neutral exposure