Traveling, Selling Pressure & EM Valuations

Dear readers,

I hope you have enjoyed your holiday season and precious family time, as I have. I’ve taken a decent break away from the blog (but not from my work) and have been traveling throughout Asia, from Macau to HK and from Thailand to Vietnam, learning about current conditions and exploring for new opportunities. I’ve noticed that my absence has created a few negative comments (especially because selling has been strong recently), where people will always cherry pick market calls I got wrong. And, let me tell you, I’ve done plenty of those, just like everyone else. But obviously, people do not know which trades I’ve held, which I cut with a tight stop losses, which showed me a profit and which didn’t. So they will speculate and this is only normal for humans to blame and attack others for their own mistakes and underperformance.

The truth is, I have enjoyed a great year and experienced a very good performance in 2015. US Dollar is by and large my biggest holding and has performed well for the second year running. I continue to hold my shorts from 2013/14 on the Aussie Dollar and the “Aussie Battler” is still making 52 week new lows as I write this (68 cent handle versus its US counterpart). Furthermore, I recommended shorting the British Pound in early November, just after I heavily shorted Silver (100% of NAV), and both trades have worked amazingly well for me. Silver’s short was probably one of the greatest nominal gains I’ve ever experienced and I am still holding it. In all honesty, my trading has enabled me to enjoy more and more freedom to consistently travel, and I will be sharing these experiences on the blog (as much as possible). I would like to remind my readers that I do not have a job which pays me a salary, like 99% of financial gurus, hot shot investment bankers and economic experts.

Therefore, If I do not perform well with my trading, not only will I not be able to travel around the world and stay in fancy hotels, but I will struggle to afford a Vietnamese Phõ noodle soup (might I add that I will never get sick of this delicious meal). I am not sure how many people who are leaving negative comments live of trading and trading alone, and how many actually do well to have the financial freedom in their lives. I assume not many…

Marc Faber

After extensive traveling, I have decided to stay in Saigon (Ho Chi Minh City) for awhile. I am looking at purchasing some real estate for myself and have come across some amazing deals. While downside is always a possibility in all markets, certain apartments here can yield over 10% with an annual rental return (rent is paid in US Dollars). This is quite attractive in an environment with cashflow returns from almost all assets are low (Treasury 10 Year yields around 2% again). Over the weekend, I decided to fly across the boarder to Chaing Mai (Thailand) and discuss Vietnamese real estate opportunities, as well as current market conditions with the legendary market investor Marc Faber.

This time around I took my best friend (far left) and my girlfriend (centre) along the way. As many of you already know, Marc is an incredibly intelligent person, who has succeeded in investing far beyond anything 99% of his peers have done (despite the fact that he is constantly attacked by media and the masses from CNBC). He also has a wonderful sense of humour. While discussing current market conditions and investment opportunities, he also threw in a few stories that aren’t for a PG rated finance blog (haha!).

Stock Market Breadth

Let us get into financial side of things now. Selling pressure has been quite strong since the beginning of the year. Bearish trend is blamed on Oil prices, Chinese economic slowdown, Emerging Markets recession, junk bond sell off, Federal Reserve interest rate rise, tightening liquidity and just about any other negative story you can google. However, just as always, I am less interested in the “why” and more interested in what the markets are doing. Yesterday was quite a strong down day, registering almost 1,400 new lows on the NY stock exchange. Historically, this is a very rare feat.

Stock Market Breadth

According to SentimenTrader research, during yesterdays sell off, technical breadth figures showed that “since 1940, only October 19, 1987 and August 8, 2011 will have seen more lopsided Up Volume over 1-day and 10-day periods.”  My own chart and data show that, when averaged over the last 10 business days, downside selling pressure approached 70%. In other words, 70 percent of all issues and volume has been on the downside. In plain English, we are very much oversold and should expect a relief rally at any point. Personally, I will be playing the rally for a potential short term gain, with tight stop loss risk management. My watchlist includes S&P 500 ETF, MSCI EM ETF, China H Shares ETF and Energy Sector ETF, all of which are showing incredibly depressed sentiment and extremely oversold breadth readings.

Stock Market Breadth

The broad index has given us a rare buy signal, with percentage of S&P 500 components trading above 50 day moving average falling into signal digit territory. Current reading of 9% is very low, but I would assume that if we closed near the lows during the last session, this reading would have been closer to 5%. Contrarian buy signals such as these are not perfect, but do work quite well as we can see from the chart above. This is only the 11th time in two decades we have a green light to go long (at least for a short term trade), and I am also considering SPY ETF for a potential rebound bet.

MSCI EM Price to Book

Away from the short term perspective, constant selling pressure is creating deep value in various assets such as Emerging Market equities. Coming into 2016, on 01st of January the price to book valuation was 1.3 times, but with losses over the last three weeks, the valuations have fallen dramatically towards 1.05 times book value. Please note that this is almost on par with the 1998 Asian Financial Crisis. Personally, I do not know on which day the final bottom will occur. There is definitely a possibility that, once we work off oversold conditions, markets will resume lower into a full blown bear market. However when the selling pressure does end, I feel it is assets such as MSCI EM Index (in particular Chinese stocks) that have the greatest upside potential.

Finally, there is a lot happening in my life right now away from this blog, both business and personal side of things. I am not anymore in my mid-20s, where the only two important things were speculating in markets and partying hard (code for chasing girls haha!). A lot more responsibilities have come, and while I enjoy writing and sharing my research for free, readers should expect less frequent updates in the future. This blog has always been free for the whole public to read and it will stay so. However, it is a shame that minority complain in my absence (when I decide to take 4 weeks off during December to January period) and constantly expect something for free, while never giving anything back in return. My father taught me that in life, giving is a lot more important than taking…

Wishing you a pleasant week!

Tiho

Macau, Vietnam & New Year!

Dear readers,

Posting will be either very limited or pretty much non existent during the holiday break. I’m currently traveling through Macau and Ho Chi Minh City right on the South China Sea, mainly regarding investment opportunities in both countries. In particular, I am interested in shares of casino companies such as SJM, Wynn Macau, Galaxy, MGM and China Sands. Regarding Vietnam, I am looking at the future economic potential and the its extremely depressed stock market together with its recovering real estate. Finally, over in United States I continue to like the beaten energy sector, which I have started to invest in since the August 25th panic low.

Wishing you season greetings and a very happy new year,

Tiho

Global Macro, Breadth & Energy Sector

Apart from US stock market, other assets continue to underperform

Global MacroSource: Short Side of Long

It hasn’t been a good year for most investors, thats for sure. US Treasury bonds have been struggling since the beginning of the year, Emerging Market equities have suffered in 2015 and Gold is on track for yet another annual decline. Technically speaking, S&P 500 remains in a primary uptrend, but has yet to make a higher high. MSCI Emerging Markets is in a primary downtrend, since at least the 2011 peak. Furthermore, EM stocks are down considerably since their 2007 all time high. Finally, after peaking in August of 2011, Gold has declined over 45% in recent years and continues its technical pattern of lower lows and lower highs. Not much is working right now.

Market breadth has been very weak over the last few trading sessions

Market BreadthSource: Short Side of Long

While the US stock market index looks good on the surface, trading only a few percentage points from its all time record high level, breadth remains very weak. In the last post we noted that the percentage of NYSE 52 week new lows was dominating recent breadth numbers. Over the last 48 hours, we have seen two consecutive days on the NY stock exchange where the number of 52 week new lows was relatively high, with 336 new lows on Monday and 365 new lows yesterday.

One of the major reasons for the poor breadth is the continual weakness in commodity producers, in particular the energy (NYSE: XLE). Yesterdays sharp sell off pushed 38% of the sector towards 52 week new lows. Sharp spikes in breadth, such as the one we saw yesterday, tend to mark oversold levels. As I write this, oil and gas stocks are bouncing…

Energy is under pressure again, with 38% of the index making new lows

Energy Sector BreadthSource: SentimenTrader (edited by Short Side of Long)

Treasuries, Euro, Market Breadth, Hong Kong & Oil

Euro bounces off support, short squeeze on bears as Draghi disappoints

Euro COTSource: Short Side of Long

Despite pushing ECB’s monetary policy further into dovish territory, it seems that Mario Draghi has disappointed overly ambitions speculators, who have been betting on a bazooka styled stimulus from the European Central Bank president. Within seconds of the new monetary policy announcement, the Euro shot up together with interest rates while the DAX 30 (German index) suffered a strong sell off.

As mentioned in the previous article on our blog, investors were uniformly positioned towards further Dollar application and as we here at Short Side of Long always say “when its obvious to the public, its obviously wrong.” European Euro exchange rate bounced sharply against the US Dollar from its technical support around $1.05 and rallied almost 500 pips within an hour and half. This will clearly hurt hedge funds and other speculators who held almost 25 billion dollar net short position heading into Thursday ECB meeting.

US long term interest rates are moving towards an inflection point

US 10 Year YieldSource: Short Side of Long

US 10 Year Treasury yields also shot up rather swiftly on the announcement, but managed to react back some of that movement the following day during Non Farm Payrolls announcement. Quite a lot of volatility in the recent days, that is for sure. There is now an interesting technical picture in development for the long term Treasury bond market, with bulls creating higher lows and bears lower highs in the yields. This triangulation is clearly leading us towards an inflection point. While we cannot be 100% certain, the current tape behaviour is signalling that interest rates want move higher. We will be keeping a close eye open the 10 Year Note and watching for any signs of a break out in yields above the 2.35% or 2.40% area.

Percentage of NYSE 52 week new lows is once again on the rise 

Market BreadthSource: Short Side of Long

Meanwhile, despite the strength in the US stock market, majority of the global equities still remain under pressure. Even within the US, breadth is quite narrow and when averaged over 21 business days, NY stock exchange is experiencing a lot more 52 week new lows relative to 52 week new highs. And yes, this is despite S&P 500 sitting at 2,091 points, which is about 2% away from a new record high. Majority of the new lows continue to be dominated by the energy sector.

OPEC’s meeting in Vienna on Friday disappointed bullish Oil speculators who have been expecting the cartel to cut production in an effort to stabilise prices and relieve the pain pressure oil producing countries are currently experiencing. Since Saudi Arabia is the only OPEC producer with over 10 million barrel per day, that can come close to matching the production of Russia and the United States, the strategy seems to be all out “pump and dump” to retain the market share. Oversupply continues to pressure prices in the short term, pushing Crude Oil WTI spot contract ever closer towards the all important $37 to $38 multi-decade support level.

OPEC disappoints Oil speculators, sell off approaching a major support

Crude Oil ReturnsSource: Short Side of Long

Speaking of multi-decade support levels, the final chart of interest for the blog readers today is the MSCI Hong Kong stock market (not adjusted for dividends). The price of the index finds itself on a very important long dated uptrend line, which has supported HK stocks during the early 1980s bust and well as the more recent 2008 Global Financial Crisis. It remains to be seen whether this city state can properly bounce of this support in coming months and quarters ahead. As a final observation, Hong Kong equities aren’t that much higher relative to the period in 1996, just before the Asian Financial Crisis. Despite many rallies and sell offs, the stock market has mainly moved sideways for almost two decades now. This will be even more true if the price breaks lower from the current critical support in the chart below.

MSCI Hong Kong index finds itself testing a major multi-decade trend line 

MSCI Hong KongSource: Short Side of Long

Brazil, USD Positioning & Gold Miners

Brazilian stock market has suffered over the last 5 years

MSCI BrazilSource: Short Side of Long

Unless you’ve been living in a cave, it shouldn’t be a surprise to any of us that the Brazilian stock market has been beaten down hard, while its economy is in the worst recession since 1930s. Investors are watching developments of national companies and politicians mixed in a corruption scandal, while recent economic data (including the GDP headline) shows the situation is deteriorating even more. There isn’t an analyst, trader or economist that has anything even remotely positive to say about this country right now (and rightfully so).

However, despite recent abundance of negative news, we have noticed that the stock market refuses to make new lows (for now). MSCI Brazil, seen in the chart above, has found support on a very long term trend line while the 3 year compound return has been as negative as it was during its major low in 2002. We also noticed a bullish reversal during yesterdays trade, so as die hard contrarians, we will be watching this market very closely for a potential trade idea…

Hedge funds are heavily long USD into ECB meeting & jobs report

US Dollar COTSource: Short Side of Long

As the week draws to a close, we have the ECB meeting and Non Farm Payrolls report, both of which will cement the short and medium term direction of the US Dollar and the European Euro. The chart above shows that hedge funds and other speculators are universally bullish on the Dollar (bearish on the Euro) and therefore positioned accordingly. No surprise there, as we are now close to approaching $50 billion in net long positions. To us, this is too bullish and could signals that there might be a chance of a shake out. Personally, we here at Short Side of Long would prefer buying a pullback (if it comes).

Finally, one interesting price development we have recently noticed is that despite Gold, Silver and Platinum making new lows even as I write this post; Gold & Silver mining companies have so far refused to follow lower. SentimenTrader noted yesterday that “the only other times this has happened, using the HUI Gold Bugs Index since its inception in 1996, occurred in the summer of 1999, early 2001 and November 2008. All showed gains over the next three months, averaging +20%.” Once again we are keeping a close eye out on this sector for a potential trade (just like Brazil).

While Gold has made new lows, miners continue to hold support

Precious MetalsSource: Short Side of Long

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