A Quick Update

Hong Kong

Apologizing for the lack of updates. Back in Hong Kong and enjoying being with some old friends, meeting some new ones, great food and drinks, awesome experiences and always a blast. As of this weekend and next week, I shall be in Shanghai. There are a lot of emails that I have to reply, so I will make sure I do this at the airport tomorrow and we have a chance to meet in China.

Market wise, not much has changed in my opinion. I will comment on one thing that really stood out in the HK financial community, however. After talking to a large amount of traders, from small or large firms, sentiment on commodities is extremely bearish. And I repeat, extremely bearish. Just about everyone thinks that Precious Metals, Iron Ore, Crude Oil, countries such as Canada or Australia, mining & metals industry is all going to hell in a hand basket.

As already noted last week, I have started buying some Silver. I have more purchase orders at levels between $15.00 and $14.60, all of which are major support levels from various times in 2000s. US Dollar continues to push higher into 88.50 / 89.00 resistance zone, while Japanese Yen is now extremely oversold. Consensus is really pushing on sided here and a reversal could be in the cards.

Focusing on shares, US equity markets might have a pull back or a breather soon, as they have rallied powerfully out of infection point in middle of October. All the bears have been crushed in the US equities, but Eurozone recovery has been rather weak when priced in USD (due to a weak Euro). In the equity space I continue to favor Russian, Japanese and Chinese stocks, and have started buying the latter (MSCI China) as already noted in the last post. I am watching the tape closely here, as I try to anticipate a possible upside breakout.

I hope to see some of you next week in Shanghai!


Portfolio Update: Bought Silver & China

I usually reserve these updates for those who subscribe to the newsletter only, but today it will be posted on the blog as well. To subscribe to the newsletter, please click here.

Chart 1: Recent newsletter purchases include Silver & Chinese equities

Newsletter Portfolio Source: Short Side of Long

Here is a quick update on the recent changes to the newsletter portfolio as well as new purchases as of last nights US trading times. As already explained in the previous newsletter update as well as on 16th of October on the blog, I covered all of my equity market shorts (Russell 2000 and Apple) while closing out Japanese Yen long. Since I’ve already reviewed the small caps shorts, I won’t go into it here. I will say that I was particularly amazed at the relative strength of Apple, as its tape refused to go down while the whole S&P 500 fell almost 10% and VIX jumped above 30.

To me, it was a one of the major signals that the stock (as well as the market) wanted to go higher. it seems that bears missed this hint. Fortunately, I was smart enough to cover my shorts but wasn’t exceptionally smart to buy Apple. As Jesse Livermore famously said, if it doesn’t want to go down, most likely it will go up. Well, Apple currently up more then 10% since I covered.

Chart 2: While hedge funds hold shorts, I’m adding to existing holdings

Silver COT Source: Short Side of Long

Regularly readers of the newsletter will remember that I opened shorts on Gold and hedges on Silver during July of this year at $1310 and $21 per ounce, respectively. I also did a quick update on the blog, notifying readers that I opened up yet another short on Gold at $1201 at the beginning of the month, in anticipation of prices breaking to new lows.

Prices have been in a mini-luqidation phase as of late, where I’ve discussed incredibly oversold conditions as well as extreme bullish sentiment on the Dollar. I’ve alerted readers yesterday via a chart that Silver has an important support level at $15. Therefore, I placed my own buy orders at $15.00 as well as $15.10. While the first didn’t get triggered, the second did.

At the same time, I decided to cut all of my Gold shorts, while still holding Silver hedges from July of this year. As stated before, I will only take away that hedge once I am 100% certain Silver has bottomed properly and is restarting a new bull run. At this moment, I’m still believe that after a rebound (which in progress now), there could be more downside left in the PMs sector.

Chart 3: In anticipation of a possible breakout, I’ve started buying China 

MSCI ChinaSource: Short Side of Long

I’ve also been discussing Emerging Market equities for awhile now. I am attracted to them because, unlike S&P 500, they have dramatically under-performed over the last 5 to 7 years. Furthermore, unlike Eurozone, which has also under-performed as well, Emerging Markets have the potential for very strong growth rates in coming years and even decades.In particular, readers might remember that I discussed China in early September of this year, including its extremely cheap valuations.

I’m not an expert trader, but to me the tape is signalling that there is a very good probability of an upside breakout in the MSCI China (refer to Chart 3). We have an overhead resistance and a series of higher lows, which look like accumulation. Prices have gone sideways since middle of 2009, so a major move could be in the cards soon. My stop loss is below the triangle pattern, so if the price was to break down from current levels, I would most likely close the trade and step aside until I am ready to buy again.

US Dollar Could Correct

Since the start of the Northern Hemisphere summer, a major theme within the global financial market movements has been the strength in the United States Dollar. Being a global reserve currency, a rise in the greenback tends to have major implications for the rest of the world. In recent months we’ve seen weakness in shares around the world, we’ve seen commodities dropping like a rock and we’ve seen global currencies under heavy pressure. Majority of these assets have now become oversold from the short term perspective, especially Precious Metals discussed on the blog in yesterdays post (if you haven’t read it yet, click here).

Chart 1: Hedge funds & other speculators are all on one side of the boat

US Dollar COT Source: Short Side of Long

US Dollar Index has gone up almost vertically, with major catalysts being divergence in monetary policies by major central banks. Federal Reserve has ended its recent round of Quantitate Easing, while European Central Bank is just starting its QE engine and Bank of Japan continues to remind the market that they will “print unlimited amounts of money”.

Price wise, we now have the Dollar Index reaching tis major resistance zone around 88.50. These levels were major selling points during the Global Financial Crisis of 2008 and the Eurozone Crisis and Greek Bailout in 2010. All of this is occurring while hedge fund positioning reaches net long extremes, as everyone is now on one side of the boat (refer to Chart 1). Simultaneously, confirming this outlooking is variety of sentiment surveys showing that just about everyone is a bull on the King Dollar (refer to Chart 2).

Chart 2: King Dollar is favourite currency of global investors right now!

US Dollar Sentiment Source: SentimenTrader (edited by Short Side of Long)

So with the Dollar being a favourite currency of global investors, just as equally the opposite side of that trade has very much suffered. Various inflation assets such as Euro, Crude Oil or Silver (just to name a few) have been beaten down within the same time frame. Therefore, it should not be a surprise that these assets have now reached major support zones (refer to Charts 3, 4 & 5), on extreme oversold conditions. As just as the Dollar happens to be everyones favourite investment right now, sentiment on these assets is negative with investors liquidating and running for the hills.

You shouldn’t position yourself based on what I think in this article. The bottom line for me is that I remain fully hedged in Silver, continue to hold naked short positions on Gold (giving my a net short PMs exposure) and remain in US Dollars for all my cash holdings. If you have been following the blog and the newsletter, you would have noticed that I opened these positions in July of this year.

While I am not yet closing these positions (I expect more Dollar strength next year), if I was a short term trader, I would be careful of a counter trend to occur for awhile. There are a huge number of Dollar bulls and a shake out could occur soon enough. In this case scenario US Dollar would correct and various stock markets (especially EU & GEMs), commodities and foreign currencies would rebound.

Chart 3, 4 & 5: Just as equally various inflation assets are now oversold!

Euro Performance Crude Oil Performance Silver Performance Source: Short Side of Long

Precious Metals Are Oversold

I did an update on Precious Metals only a week ago and since then we’ve had a lot more of selling. While I remain fully hedged in Silver and also continue to hold my naked short positions in Gold, I believe that any further downside from the current levels will eventually see us reach extremely oversold conditions from which a major rally should occur. In coming weeks or months, depending on how long the selling exhaustion lasts, we could be approaching an all important buying opportunity.

Please understand that during the last leg of the bear market (I believe that is where we are), liquidation can last for awhile. I happen to think that majority of the sector will be under pressure until Gold re-tests its phycological level of $1000 per ounce (give or take some dollars). However, this isn’t necessary a prediction as I acknowledge that a low could now come at anytime as we are becoming very oversold. More and more indicators are flashing buy. Let us go through some of these extreme indicators:

Chart 1: Gold miners are oversold & have fallen 41% the last 3 months

Gold Miners Performance Source: Short Side of Long

Prices of various assets within the Precious Metal sector have gone down a lot over the last rolling quarter or 3 month period. Consider the chart above, which shows an extremely oversold conditions in Gold Mining shares, which are currently down 41% over the last 90 days. This is an astoundingly large drawdown, only second to the Global Financial Crisis of 2008.

In the same period Gold is down almost 13%, Silver is down almost 22%, Platinum is down over 17%, Silver Miners are also down over 41%, Gold Mining Juniors are down a whooping 46% and Silver Mining Juniors are down close to 45%. The carnage isn’t over a year or two, it is all in just three months. As already stated, these are some insane losses in a very short period of time, especially considering the bear market is over 3 years old!

Chart 2: Silver price is more then 20% below its 200 day moving average

Silver vs 200 MA Source: Short Side of Long

With prices so oversold, it shouldn’t be a surprise that indicators such as the one in Chart 2 are once again entering extreme reading. Sure, they’ve been even more extreme at times, but when an asset is more then 20% below its 20 day moving average (like Silver is today) you should pay attention. Who knows… it might go down to 30% by next week, but my point here is that a rebound and a mean reversion is in the cards very soon indeed (obviously let the selling run its course first).

Also consider the fact that Gold is trading 10% below its 200 day MA, which is quite a rare event. I think it has happened only 8 or so times over the last 25 years. Gold Miners find themselves more then 32% below its long term MAs. Finally, Gold Mining Juniors are in total wash out mode, as they trade almost 40% below the 200 day MA and over 27% below its shorter term 50 day MA. This is just getting ridiculously oversold now…

Chart 3: There are now 0% of Gold Miners trading above 50 & 200 MA

Gold Miners Breadth Source: SentimenTrader

One thing is clear here. Gold Mining shares, whether they are large caps or small caps, have been beaten down… no, I think I should say they have been smashed and bashed like Rocky during his famous fights. And this is also reflected in breath readings. There are 0% of companies within the HUI Index that are currently trading above the 50 day or 200 day moving averages.

But oversold breadth readings don’t stop there. A handful of days ago we saw the 88% of the components within the index make 52 week lows, one of the highest readings ever and an indication of total liquidations and free fall declines. Also of note, Bullish Percent Index is at a reading of 0%. This occurred once during the 2008 crash and a cluster of three times during the 2013. All of them led to major rebounds.

Chart 4: Hedge funds and other speculators are now heavily short Silver

Silver COT Source: Short Side of Long

As we wait for the this weeks release of the Commitment of Traders report, we can already assume that positioning is going from bad to worse. The bottom line is, a major shake out is in progress. Hedge funds have already been heavily short Silver and that is most likely going to intensify further. At the same time, sentiment surveys are showing an extremely negative picture, with hardly anyone believing Silver will rise from here. Sentiment readings aren’t any better in Gold and Platinum, where prices have been dropping like a rock.

Finally, speaking of prices… Gold is trading more then 3 standard deviations away from its 50 day mean yesterday. This is a very rare event, especially when Bollinger Bands are wide. It should be considered an extremely oversold condition, and judging by history it is from where powerful rebounds and mean reversions tend to occur.

Chart 5: Gold price is trading 3 standard deviations away from its mean

Gold Oversold Source: Bar Chart

Is this the bottom for Precious Metals like Gold and Silver? I do not think so, but I will say that we are getting quite close now. In other words, it should be matter of weeks or months instead of a matter of years. One thing is for certain, this is not a time to be entering new short positions on these beaten down assets.

Precious Metals investors have watched as a bear market slaughtered just about all assets within the sector. Even Gold is now down 40% from its all time highs. Regular readers of the blog will know that I thought that buying Gold at $1185 in 2013 was a very good entry.

I still hold that view today! Now the prices are sinking even lower towards $1100 per ounce, so buying Gold has gone from a very good entry towards a great entry. If it gets down to $1000 per ounce, it will be a magnificent entry. The lower it goes over the coming weeks and months, the better your return will be in coming years!

Visiting China In November

Chart 1: Forget New York, Shanghai is becoming the centre of the world!

 Source: Unknown / Internet

Dear readers from China, in particular from Shanghai, I will be visiting your amazing city during middle of November as I once again do a trip around Asia. In recent times I have become fascinated with continent, taking trips around the region every couple of months. I am visiting and learning about as many places as possible. In all honesty, the change that is taking place is dramatic, especially the speed at which it is all happening.

If you happen to think that New York is the centre of all the things, you might be in for a surprise (especially if you give Shanghai another decade or two to play catch up). The energy of the city is unbelievable and the pace of its progress astounding. The world is not turning Japanese (as the famous song once stated), but instead Chinese. It is their time and they are definitely rising to the occasion.

Don’t believe me? Ok, fine. Watch what a world renowned traveler and chef from Manhatten, New York had to say recently: watch the episode by clicking here.

If you would like to get in contact with me to sit down and discuss finance, have a nice dinner or just simply get drunk and have a good time (what life is truly about) – do not hesitate to contact me. The best way to reach me is via email at tihobrkan [at] gmail.com.

During November, I can also be found in other financial centres such Hong Kong and Singapore, plus a few other cool places around the region. Another adventure awaits!


Chinese Equities Ready To Move

Chart 1: Chinese equities are poised for a huge move very very soon… 

MSCI China Source: Short Side of Long

I’ve discussed Chinese equities for a few months now on the blog as well as through newsletters. Their valuations look extremely cheap, especially relative to their peak in 2007. Chinese stocks also look very cheap relative to other developed stock markets like the United States. Red Dragon’s stock market priced in US Dollars has done absolutely nothing since middle of 2009, which makes it flat on a 5 year compound rate of return.

Fundamentally, since at least 2011 just about every trader, investor, analysts, strategist and economist has been talking about the possibility of Chinese hard landing. To say sentiment on China has been bearish is an understatement. In my newsletter I discussed how during my Asian trip in May, almost every single investor I met up with was negative on the country.

Furthermore, many have called Chinese equity price rise in 2007 a bubble from which the stock market will not recover. I believe this is far from the truth. A sharp rise in 2007 was essentially a restoration of prices back to levels we saw during middle of 1990s. One could make a claim that Chinese equities are forming a huge rounding base, from which a breakout towards early 1990s prices could occur.

However, none of this really matters… until it does. Fundamentals are useless until the market decides to price them in. For China, I believe that time is now. Technically the price could be breaking out on the upside over the coming months and there is a possibility that Chinese equities could have a stellar performance in 2015 and/or 2016.

Precious Metals Update

Chart 1: Gold mining companies were decimated in this weeks sell off!

Gold Miners Source: Bar Chart

This week we saw mini turmoil in the Precious Metals sector. The selling pressure on huge volume is occurring on the back of news that the Federal Reserve has finally exited its third round of bond purchasing program (the last bit of tapering is now complete). While the metals suffered from strong selling (Gold down  4.7% & Silver down 6%), it was the producers that took it hard on the chin.

Gold miners declined 16%, while the yellow metal juniors were down a whopping 21%. Silver miners didn’t fare too much better, with producers declining over 14% and juniors down over 15%. Chart 1 shows that this weeks panic came after Gold miners had already fallen about 25% from their recent peak in July to their support around $20 on the ETF.

Chart 2: Gold prices are attempting to break down lower towards $1000 

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

A few precious metals perma-bulls, which have called for the bottom in 2012 and 2013, have now once again called a bottom here. They claim that we are now in the process of liquidation and its time to buy Gold miners (again). After the current round of selling, I’ve also received a few emails asking me if I will be buying more PMs or literally telling me that the bottom is now in for sure.

Personally, I am not 100% sure of that to be true. I have stated many times on this blog that after a powerful advance of 12 annual gains in the row, Gold will most likely be correcting for awhile and a re-test of $1000 per ounce level should not be ruled out.

This week we witnessed the beginning of the breakdown in Gold prices (refer to Chart 2) and this does NOT look like liquidation to me just yet. We have barley made a new 52 week low. I believe the selling pressure is just about to start, and if Gold was to fall towards $1000 or so, we could be close to a major bottom and a very important buying opportunity.

Chart 3: Shake out has a long way to go before we have a buy signal!

Gold COT Source: Short Side of Long

Positioning in Gold is still quite elevated, even though COT report above does not include major selling days from Wednesday to Friday. Leading into the FOMC decision, hedge funds and other speculators held net longs equivalent to 25% of open interest. Assuming the strong selling later in the week forced even more hedge funds to be shaken out, we are still far away from levels we saw in June and December of 2013, when position was in single digit percentages.

Also to note: before a major bull market began in 2001, positioning on Gold stood at net short levels, something we have not seen in a decade and half. During the current correction, why couldn’t hedge funds and other speculators enter real panic and actually turn net short Gold? I believe it is possible and would give a major contrarian buy signal.

Chart 4: Miners offer amazing value, but Gold itself needs to bottom first

Gold vs Gold Miners Source: Short Side of Long

I want to make sure that my words aren’t getting minced in a blender here, so it looks like I’m jumping from bullish bandwagon to bearish one and back again. From the investment point of view, I continue to be a long term bull on Gold, and in particular Silver. I have never owned mining or producing companies, but I do admit that they are now becoming incredibly attractive as well (see Chart 4).

Regarding investment outlook, one should always respect the tape and not argue with the market. That is why I am not buying any new positions just yet and have not bought for over a year now. That is also why I opened full hedged Silver as well as opened naked short positions on Gold in July of this year. While I eventually see huge upside for both precious metals in the coming years, I do admit that the current trend is lower and the correction needs to bottom out first.

Disclosure: I opened yet another short on Gold at $1201 in Friday’s Asian trade, in anticipation of the triangle breaking lower (refer to Chart 2).

Portfolio: Reviewing A Recent Trade

While we wait for the FOMC decision, I thought it would be an interesting learning experience to present a recent trade I’ve been apart of. The most interesting part about it is not the success or failure, but how it all played out in real time and surprised so many investors (including myself). In the future I will do more of these posts, regardless of whether they are winners or losers, which might help some of you with your own trading. I know that putting pen to paper (or in this case fingers on the keyboard) and reviewing my recent decisions & action definitely helps me.

Chart 1: Opened the short against US small caps on 19th of September

Russell 2000 Opening Short Source: Bar Chart (edited by Short Side of Long)

I cannot possibly cover everything that goes to my mind when executing trades, so I will keep it as brief as possible. On Friday the 19th of September, I was away on a trip and happened to be in Seoul, South Korea. Even though there are quite a lot of distractions there (haha!), I was keeping a close eye on the global equity markets, hold neither longs or shorts. I wanted to short the small caps index for awhile, due to its high valuation reading and deteriorating breadth participation (amongst other signals).

As I looked at the September edition of Merrill Lynch’s Fund Manager Survey, I noticed that funds held a very high exposure towards equities. At the same time we were approaching end of QE and volatility could pick up.

I also noticed the huge divergence between large and small caps like S&P 500, which at the day of my entry was at record highs. Furthermore, global breadth was thinning, as the actual correction started in June with Europe leading the way to the downside. Furthermore credit spreads and volatility was starting to rise, indicating some sort of financial stress in the system.

I opened my short on the Russell 2000 via IWM ETF at $114.55 with a very tight stop loss above the reversal candle at $116. I was prepared to risk about 1.2% on the small cap index and since the stop loss was very tight, to make the trade more powerful, I decide to use a lot of leverage (20 is to 1). A loss would only cost me couple of hundred basis point of my fund’s NAV, while a win could be a very handsome reward indeed.

Chart 2: Didn’t expect Russell to go straight down for next few weeks… 

Russell 2000 Covering Short Source: Bar Chart (edited by Short Side of Long)

Once the trade is open, no one of us ever really know what comes next (regardless of how smart some of us sound). That is why a review of recent price events as well as my own thinking process is an interesting read in hindsight.

Following the short position, for weeks the Russell 2000 kept declining and under-performing larger cap stocks. The sell off started to intensify in early parts of October and various media outlets were puzzled as to why stocks were falling. I was in Singapore at the time and talking about my short position to a friend, who I regard as mentor. I was saying how media is blaming it on Eurozone, some blamed it on Ebola and others said that ISIS 9all the way in Iraq) is behind the declines.

At this point Russell 2000 already declined by about 10%, so media coverage started to focus on how small cap stocks were already in correction mode, giving it plenty of negative attention. As the ETF broke below $108, many technical analysts stated that the neckline of a “head & shoulders pattern” was triggered and that Russell 2000 could fall by at least another 10 to 15 percent… if not totally crash!

On Monday the 13th of October I noticed that something started to change. US small caps started outperforming their larger cap counter parts, with tape refusing to move lower. As the VIX dramatically spiked on Wednesday the 15th (usually a signal of capitulation), Russell 2000 barley budged lower. Then we saw Treasury Bond prices spike higher in panic buying as majority of bond bears realised that rate rises might not come as early. I decided to cover all my shorts and close my Yen long (safe haven play opposite to stocks).

I remember at the time talking to another friend in Singapore and telling him that my instinct & gut feeling is telling me at least a short term inflection point is at hand. Because I was heavily leveraged and the trade was a huge success making a mini fortune most people don’t earn in years, I decided to walk away at that exact moment.

Chart 3: …or to rebound crazy straight back up in a few weeks after that

Russell 2000 The Rebound Source: Bar Chart (edited by Short Side of Long)

Various bloggers I follow were certain that we were about to enter a waterfall decline, also known as a crash. They stated various indicators and analogues, dating all the way back to 1929. At the same time, extremely popular and ever so famous investing guru – Dennis Gartman – was on CNBC letting everyone know he was 100% cash and T-bills because a “huge bear market is coming and would last for months.” Little did we all know what would happen next.

The rebound in US equities has been quite amazing, as prices have now literally returned to the point from which they originally fell (especially seen in Chart 4 with S&P 500). It turns out that, if I held onto my shorts, as of last night I would pretty much be at a break even level. I would assume many bulls have been shaken out of their long positions, while many bears were sucked into believing that a downtrend is starting right before the short squeeze. Both sides are now scratching their heads…

After all, the job of the market is to thieve and steal as much money as possible, from as many participants as possible, in as many occasions as possible. And please do not think because I made a correct decision this time around (on the short term basis), that I am extremely smart or something. Personally, I have been humbled by the market on many, many, many occasions and I’m sure I’m awaiting my next punishment just around the corner!

Chart 4: US stocks have been a huge surprise for both the bulls & bears

S&P 500 Rebound Source: Bar Chart

So I leave you with this great quote: a wise trader once said that the stock market is a man’s invention that has humbled him the most. If you are not humbled, you haven’t been around for long enough or you are just delusional. Finally I would like to ask all the fellow readers of the blog and the newsletter to jump on the poll and vote on the question below.

What is your current view on US equities?

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