What We're Reading

With the SPX up ~8% in just the last month, increasingly nervous investors who still vividly recall the freefall days of December 2018, are wondering what will stop the unrelenting rally according to JPMorgan's Adam Crisafulli who writes this morning that while there are always risks, none of the (known) ones seem particularly threatening at the moment.

Still, according to the JPM strategist, investors should be wary about chasing the SPX above 16x (i.e. above ~2750) but the index is more likely to touch 16.5x (>2800) than it is to hit 15x (<2600) based on everything known right now.

With that modestly bullish bias in mind, Crisafulli lists 14 things that can go wrong and send stocks sliding once more.

1. TSYs and the USD fail to ratify the Fed optimism – at some point the TSY curve needs to steepen and the USD has to weaken in order to confirm the dovish takeaways from the recent Fed decision.  If TSY yields fall across the board (or even worse, if the curve flattens) and/or the USD sta

Complex systems are all around us.

By one definition, a complex system is any system that features a large number of interacting components (agents, processes, etc.) whose aggregate activity is nonlinear (not derivable from the summations of the activity of individual components) and typically exhibits hierarchical self-organization under selective pressures.

In today’s infographic from Meraglim we use accumulating snow and an impending avalanche as an example of a complex system – but really, such systems can be found everywhere. Weather is another complex system, and ebb and flow of populations is another example.

Markets are Complex Systems

Just like in the avalanche example, where various factors at the top of a mountain (accumulating volumes of snow, weather, temperature, geology, gravity, etc.) make up a complex system that is difficult to predict, markets are similarly complex.

In fact, markets meet all the properties of complex systems, as outlined by scientists:

1. Diverse
Sys

“Low volatility could be ‘the quiet before the storm,’” Nobel laureate Robert Shiller told CNBC last week, adding: “I lie awake worrying.” Over the past 20 years, the CBOE Volatility Index (VIX) has closed below 10 on only 21 days, 13 of which have been in the past two months. The current streak of 270-plus days without a 5% drawdown in any of the major U.S. indices is the longest since 1996. Meanwhile, U.S. equity values continue to diverge from earnings — Schiller’s Cyclically Adjusted PE Ratio (CAPE) has only been higher two times in market history: 1929 and 2000.

It’s hard to predict when a stock market crash will occur, so the best defense is to be prepared.

Today’s infographic comes to us from StocksToTrade.com, and it explains what happens when a large enough drop in the market triggers a “circuit breaker”, or a temporary halt in trading.

These temporary halts in trading, or “circuit breakers”, are measures approved by the SEC to calm down markets in the event of extreme volatility. The rules apply to NYSE, Nasdaq, and OTC markets, and were put in place following the events of Black Monday in 1987.

Circuit Breaker Rules

Previously, the Dow Jones Industrial Average (DJIA) was the bellwether for such market interventions.

However, the most recent rules apply to the whole market when a precipitous drop in the S&P 500 occurs:

Upon reaching each of the two first thresholds, a 15-minute ha

Auto loans have shot past the $1 trillion mark in the United States and now make up a significant component of the overall consumer debt picture.

Subprime auto loans – which are riskier loans made to customers with poor credit – have helped to drive the market since the Great Recession. However, with auto loan delinquencies ticking up in recent months, investors have been searching for answers about the sector.

Are we in for some sort of subprime auto loan crisis, or is there another explanation for what is going on?

Subprime Auto Loans: a Shifting Market

The data and perspective in today’s infographic comes from consumer credit reporting agency Equifax, and it helps to explain what is potentially going on in today’s auto loans market.

This week, the SEC gave us a belated Christmas present.  But what does it actually portend?

The present in question is an 88-page "Research Note" from the SEC's Division of Trading and Markets titled "Equity Market Volatility on August 24, 2015." It's an innocuous-enough title, but for us market-structure wonks, it's kind of a big deal.

The conclusions of the piece are purely factual, and include dozens of pages of juicy charts and tables (be still my nerdy heart!). There's little or no conjecture, and there's absolutely no policy recommendations.

It outlines the facts of that fateful trading day, discussing what went wrong, and which classes of securities were affected. It's a gold mine for folks who want to dig in and understand what happens when things break, and, for any investor, it's worth reading at least the first six pages.

Key Findings

Here are the most interesting findings—not just because they're objectively interesting—but because they give you some insight into where the

"A few outsiders saw what no one else could". Hat tip to sadiq. With so many big stars, I'll be watching this one.

In the stock market, until recently, just about any news was good news.

Company earnings stumbled? Investors shrugged them off, sending shares higher. Economic growth was disappointing? So what.

But now that is changing.

Consider the recent trading in Apple, the world’s most valuable public company and a certifiable stock market darling. Apple announced third-quarter results on July 21 that were “amazing,” according to Tim Cook, its chief executive. Revenue rose 33 percent over the same period last year, and earnings per share were up 45 percent.

But investors seized on the fact that demand for the iPhone and the company’s new smartwatch didn’t meet expectations. Apple’s shares have lost 11.3 percent since then.

“I thought the break in Apple was a pretty big deal,” said Bill Fleckenstein, a veteran money manager at Fleckenstein Capital in Seattle. “They made all the numbers, but units were light. Maybe that is a precursor to what the entire tape is going to show us.”

The reaction to C

This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor's 500 Index lost 2.09 percent and the Dow Jones Industrial Average fell 1.95 percent. Volatility exploded, as the Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, to 18.85. 

One would imagine that such a scenario might be constructive for gold. It has been called the best measure of fear, the only real currency, a refuge for those who plan for panic. So how is it doing these days? Spot prices were soft on Monday, despite the wild volatility in equities, drifting down a few bucks from about $1,180 an ounce to about $1,176. They fell a few dollars more yesterday, and are soft Wednesday.

I thought gold was an investor’s best friend dur

Stock markets have enjoyed a banner half-decade, forcefully reclaiming the ground lost to the financial crisis, and then some. This vigorous performance has occurred thanks, above all else, to two key enablers: surging earnings and recovering valuations. On the surface, there is nothing especially questionable about either. Earnings naturally rise as economies grow, and valuations recover as risk aversion fades.

However, a closer examination reveals a significant vulnerability within this cozy equation. Corporate earnings growth has been, in a sense, too good – persistently outpacing both revenues and the economy. This has driven profit margins to multi-decade highs.

Worryingly, profit margins have long been assumed to be mean-reverting, arguing that these juicy gains may eventually have to reverse. Such a scenario would necessitate an eye-watering one-third decline in the S&P 500. With stakes as big as these, a clear sense of the downside risk is imperative. This report evaluates th

Very quickly some morning headlines.  While a few of the geopolitical risk headlines may be behind us (Brazil election, Russian border, etc) I believe markets are waiting for this quarters earnings (and guidance) to set the stage.  Multi-nationals with exposure overseas may struggle going forward if one believes the headlines below:

• IMF revises and raises growth for the US BUT lowers prospects for the world (4.0 to 3.0%)
• IMF says some valuations are "frothy"
• SODA warns of miss and citing lower US demand (stick a fork in it)
• Women's apparel mfgr CBK warns of lower sales; blames low mall traffic.
• Hong Kong retailers experience sharp sales decline (blames protests of course because happy people would be spending)
• AGCO cuts forecast, shares down 6% premarket
• Taiwan's exports growth slips
• MCD Japan expects net loss this year
• Slide in German industrial output stokes fear of recession

I'd be trading this bad boy to the long side.  In this seven year weekly chart, not only has it broken my three trend line rule, there was positive MACD convergence (as shorts began to massively cover) and the 200week SMA which was prior resistance, has now become support. 

It certainly appears that the "low" in low rates was in in 2013.

I should also note that the monthly chart is deeply oversold.  At some point, you simply run out of sellers.

I've long said that when in mortgage banking, we watched the 10yr. each week for direction of rates and we completely ignored the Fed raising or lowering rates.  They were a laggard; the 10yr was already there.

Yep.  If this were a stock, I'd be trading it long, buying at support or out of the short side completely.  Maybe not expecting anything spectacular in terms of upside but ROC would indicate no heavy selling; short covering more than anything else. 

I believe we've entered the phase in our bull market where "good news" is now bad new

Today during the Fed's testimony to the House Financial Services Committee, Liz Warren waited her turn patiently until the end of the day.  I just love Liz for saying it the way it is.  No holds barred.

After comparing Lehman at the time of it's collapse, LEH had $639 Billion in assets.  Today JPM has $2.5 Trillion (more than 4x LEH) in assets.  LEH had 209 subsidiaries.  Today JPM has.........are you ready for this...............3,391 subsidiaries!  Too big to fail?  Wowwww.

Then once done pointing out JPM's notably 15 times more subsidiaries than Lehman, Liz went on to question JPM's resolution plans to remain viable in case of a risk event.  Clearly determined to make one thing crystal clear to the Fed's Janice Yellen, she went on to say..............well, you watch the two minute clip.

Many eyes are watching the VIX as it has not decayed recently and made another new low.  This holding pattern could be due to concerns over Russia possibly invading the Ukraine (who believes them when they say "nyet"), concerns over lackluster earnings, the dreaded "taper", fear of rising rates and a long-in-the-tooth bull run. 

Looking back over recent history, the VIX did a similar basing in the Spring/Summer of 2013 when each month, there seemed to be a "fear" the Fed would announce removing their foot from the QE gas pedal during their FOMC meeting.  18 Italian banks being downgraded just poured more fuel on that short term fire spiking it even higher.  Of course, the market recovered but there seems to be much more going on behind the curtain at this point.

To quote Marvin Zonis from last weeks CBOE Risk Management Conference, "“We are in the age of major, major political risk.”  Not only is taper on people's minds, but larger geo-political concerns are out there as well such as

These are simple but they changed my trading immensely.  What tip (or 2) would you give to a new investor or trader?

How many times has this happened to you?  You're "in" a stock certain you're certain it's a winner.  You place a $1.00 stop because after all you don't want to lose more than $100. 

The next thing you know you're stopped out, only to see it reverse and head higher without you.  Was it your execution?  Is the market a rigged game?  Are they out to get you.....or was it the $100 you were willing to risk?  Was it, in fact, large enough?

Here are a few basics I've learned since I began actively trading:

1. I don't buy a the open.  I wait for the opening drive to dip down, possibly even test the prior days mid-to low area OR I have a standing order waiting at a major moving average or fibonacci area (I love fibonacci!).
2. I had to erase the thought of risking $1.00 on a trade (unless it's a small stock).  Period.  Zip.  Hands down. Put it out of my head.  After all, i

Reprinted from http://mauldineconomics.com

Would the Real Peter and Paul Please Stand Up?

By Dylan Grice

In a previous life as a London-based ‘global strategist’ (I was never sure what that was) I was known as someone who was worried by QE and more generally, about the willingness of our central bankers to play games with something which I didn’t think they fully understand: money. This may be a strange, even presumptuous thing to say. Surely of all people, one thing central bankers understand is money?

They certainly should understand money. They print it, lend it, borrow it, conjure it. They control the price of it... But so what? What should be true is not necessarily what is true, and in the topsy-turvy world of finance and economics, it rarely is. So file the following under “strange but true”: our best and brightest economists have very little understanding of economics. Take the current malaise as prima facie evidence.

Let me illustrate. Of the many elemental flaws in macro

This originally posted by Carl Swenlin from DecisionPoint via StockChart.com [see link below]

LONG-BOND YIELD: HOW LOW CAN IT GO?