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Global Tactical Asset Allocation Q2 Update On Commodities

Tyler Durden's picture




 

The latest commodities commentary from Damien Cleusix of Global Tactical Asset Allocation:

Investors surveys are indicating a high level of  optimism. Long gone are the days when they reached high levels of bearishness (at the end of August).  Hedge Funds have increased their leverage (gross positions) and have their highest net long position since 2007.
 
Option indicators have deteriorated markedly. The CBOE equity put call ratios remains low with a rising 10 and 21 days moving average (same is true for the inverse of the ISEE equity only CP ratio). The OEX PC ratio has been extremely high recently with a multitude of bearish "above 2" readings.  At the retail levels, we are seeing almost 60% of the activity concentrated in bullish strategies. The buy to open put call ratio is very low, and very few puts are bought to open while many are sold to open. There are no fears of waterfall declines. Skews have risen before implied volatility did which has historically been a negative.
 
Analysts earnings estimate ratios have been rising rapidly while corporate guidances have been declining. Analysts earnings outlook is more upbeat than the sales one. They expect margins to increase from current record levels.
 
Insiders activity remains bearish for most markets. We had net buying in the US during the last week of August but the selling has been of historic proportion in the US during the past 4 months. The UK buy to sell ratio is slowly reaching its 2007 lows while we are seeing more companies buying stocks than selling in Europe. In Asia, there were heavy selling in January but there were only few buy or sell transactions in February.
 
Our preferred “market timers” continue to have opposite opinion on the markets future path. J. Hussman is completely hedged while S. Leuthold has kept the exposure he rapidly built last autumn. The best value managers have continued to reduce their exposure to the market indicating that the markets will have to fall more before we see fundamentalists buying from the technical traders.

Speculators have a relatively high net long Nasdaq 100 future position. Strategists have maintained their equity allocation recommendation at its cyclical high. We are seeing a rush into bullish and leveraged bullish funds at Rydex and a collapse in assets of bearish funds where stop losses are being hit by the relentless advance.
 
The VIX time-spread has corrected slightly but remains far from the levels where the markets start to rebound after a meaningful correction.
 
Breadth volatility continues to be very high. It is currently hard to give as much weight as we usually do to this area. The positives are that the various advance decline lines have not diverged negatively and we had numerous intermediate-term thrusts late last year. The negatives are that our Nasdaq new highs-lows model produced a sell signal, the markets experienced a high number of buying climaxed 2 weeks ago and the number of 52 weeks new highs have failed to confirm various indices new cyclical highs. The latter was one of the elements which was supportive after the April top. Markets tend to at least retest the highs when the correction starts at the same time that the number of new highs makes a cyclical high. Selling pressure has increased in the past 10 months. Note that this is not the opinion of Lowry's Research, THE reference with regard to breadth analysis which is saying that selling pressure is not yet a big problem. Our short-term top warning models have been on high alert since the third week of February with worrying divergences between the % of stocks above short-term moving average and their respective indices . Dispersion has increased but has yet to reach bearish levels.
 
On the liquidity side,  net inflows in US domestic and developed markets equity funds have picked up markedly while there was no net inflows into emerging markets equity funds in the past 13 weeks. The cash ratio has declined everywhere and does not leave much dry powder to managers. Net redemption will have to be met by selling current holdings. The number of buybacks has declined slightly in the US and plateaued in Japan. In the US we have seen a big increase in IPOs and secondary offerings. Corporate America is now a net seller. And remember, they are many issues still in the pipeline with ridiculous valuation being applied to some new US start-ups already soon to be IPOed with no barrier to entry companies.
Margin debt has increased sharply in the US. It is not far from the 2007 highs when one look at its size relative to overall market capitalization.
 
Pension funds’ funding status has improved since November, courtesy of rising assets and declining liabilities (discount rate rising). But this remains one of the big, big problems the markets and retirees will have to face in the coming years.
 
M2 has gained some short-term momentum . Permanent Open Market Operation are now an almost daily exercise.
 
Seasonals are supportive. Our mechanical seasonal model is on buy since early October. The 40 cycles low is due  around the middle of March . With regard to the Presidential Cycle, the 18 months following the mid-term election have been the strongest historically but remember that the typical fiscal and monetary cycle has been distorted and pushed forward in the past 2 years. Average outcome very unlikely. The market has a tendency to perform well between the middle of March and the middle of May.
 
Intermarket relationships are mostly negative. The fact that the correlation at the stock, style, index and asset levels has been very high recently makes intermarket analysis a much less powerful tool.  The defensive sectors have performed  poorly in the past 4 months but have been rebounding strongly during the past 10 days. The Nasdaq, semiconductor and bank sectors have underperformed in the last few weeks.  Emerging market are underperforming (always worrying to see the leader in this situation when prices move higher). High yield bonds are not diverging negatively but corporate CDS have. The increase in oil price (and other commodities), if sustained (they have already reach levels where they are strong headwinds but can not yet break the macro cycle by themselves), will have  very nasty consequences. Commodities spot returns are  starting to print short-term negative divergences, with copper correcting sharply. Treasury bonds yields have  started to decline.
 
Markets have started, later than expected, to correct some of the short-term excesses they have accumulated in the past few months. While in normal time we would have expected the correction to be in the 7-12% range for the S&P 500 (1180-1240)(use beta to adjust for other markets) the events in Japan are making any forecast even more useless than in normal time. The earthquake and tsunami in themselves are not posing any meaningful short to medium-term risks, the Fukushima nuclear plant accident will if it escalates. 
 
Our cyclical models are still positive so we have to assume that we will see new highs later this year. Note that the failure on the number of new highs to  confirms the current highs, the high yield bond markets divergence and some other elements make this assumption less strong that it was last summer. One should be mentally ready to sell the long position which will be acquired when certain "oversold" thresholds are reached with a loss if a rebound fails to materialize and the cyclical models move to a sell signal.
 
We are puts sellers on a test of the 1240-1250 area (S&P 500). We would sell 6-10% OTM puts on various indices with a May-June expiry. We are keeping the short calls position which has now moved deep OTM (10-16%). We will take an outright long position on various indices on a S&P 500 move to the 1180-1200 area if signs of panic appear and breadth become very oversold (less than 10% stocks above 10 days moving average and 50 days moving average on broad indices, no too important breakdown in new highs lows statistics,...). We would become even more aggressive if we see divergences forming between prices and our broad range of breadth indicators.
 
We would continue to underweight emerging markets but less than before in the short-term, Europe  and small caps(US, European and emerging markets small caps could/will underperform large caps by 3-5% yearly in the next 5-7 years) . We would overweight Japan (once we are sure that Fukushima nuclear plant is under control) (but hedge the currency risk) and the US. Buy high quality stocks (and hedge the market risk when we recommend it). Value and growth are likely to behave badly in a downturn so value managers won't offer the decorrelated returns they offered during the 2000-2003 decline. Buy value when value dispersion is high not low as it is now

Full report

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Thu, 04/07/2011 - 22:29 | 1148105 CrashisOptimistic
CrashisOptimistic's picture

Only one commodity matters, and here's the first admission from any official economic org.

"WASHINGTON, April 7 (Reuters) - The International Monetary Fund on Thursday warned that the global economy was entering a period of scarcer oil that could drive prices up rapidly. In new analysis by the Washington-based global financial institution, the IMF said market tensions were increasing between growing demand for oil from fast-growing emerging market economies, like China, and production constraints due to maturing oil fields."

Fri, 04/08/2011 - 00:03 | 1148495 mr66
mr66's picture

They need to kick the can down the road.  Forget balanced budgets. They will never happen.  We need more QE, or the consequences will be so bad you will not like to be around.  Just keep printing money and see what happens.

Fri, 04/08/2011 - 00:18 | 1148542 Oracle of Kypseli
Oracle of Kypseli's picture

As long as Ben is on the gas pedal, so should we. Pm's till he lets go.

Oil is being depleted that's not debatable. What's debatable is the horizon. 5,10,30?

Still too close for comfort. Act accordingly even if you are not sure.

BTW: Gold will be the only medium of exchange if you need any scarce commodities.

Thu, 04/07/2011 - 22:32 | 1148107 long juan silver
long juan silver's picture

'Most commodities remain overvalued..Gold optimisim remains high"

 

What time is it?

Gold bull circle jerk time.

Thu, 04/07/2011 - 22:43 | 1148134 Buckaroo Banzai
Buckaroo Banzai's picture

Actually it's PEANUT BUTTER JELLY TIME!

http://www.youtube.com/watch?v=s8MDNFaGfT4

Thu, 04/07/2011 - 22:48 | 1148146 long juan silver
long juan silver's picture

Does the link describe methods of masturbation using hoofs?

 

Thu, 04/07/2011 - 22:33 | 1148110 Turd Ferguson
Turd Ferguson's picture

Blah blah blah

Buy silver before it breaks 40. I was waiting for a dip that didn't materialize. Now it looks like 44-45 before the end of the month.

http://tfmetalsreport.blogspot.com/2011/04/cant-wait-for-tomorrow.html

Thu, 04/07/2011 - 22:33 | 1148118 long juan silver
long juan silver's picture

Somewhere a used mattress dealer is missing his sidewalk barker

Thu, 04/07/2011 - 23:22 | 1148317 SumSUN
SumSUN's picture

Yeah turd, i remember Silverfuturist referencing your blog.  I checked it out, looked real good and i was considering buying some puts on SLV.   But did not, couple days later, bought more coins.   I'm glad i did.

Fri, 04/08/2011 - 08:24 | 1149323 earnulf
earnulf's picture

I was also expecting a dip that has "not yet occured", but I am confident in my current physical position, just looking to add.   Like many I'll probably by at whatever and keep some powder dry for any dip that does occur.    I'm sure that for many of us, a 50% correction would be a massive BTFD!

Thu, 04/07/2011 - 22:43 | 1148133 RobotTrader
RobotTrader's picture

Here's my simpleton analysis:

1) IWM and EEM are leading

2) Financials refuse to crack

3) Market continues to buck off catastrophes

4) U.S. Dollar still tanking, no flight to safety bids

5) Gold and oil continue to grind higher

6) Most spectacular parabolic stock charts are in the consumer discretionary sector

There isn't anything really bearish that I can see just yet.

Thu, 04/07/2011 - 22:45 | 1148138 Buckaroo Banzai
Buckaroo Banzai's picture

Robo, I have difficulty making sense of your posts when they don't include half-naked women.

Fri, 04/08/2011 - 00:24 | 1148553 rocker
rocker's picture

Sounds like you half back. Where the hell are the full size pics.  We need the stimulus. Sort of like QE3. Feed us.

Fri, 04/08/2011 - 00:27 | 1148576 Oracle of Kypseli
Oracle of Kypseli's picture

Robo,

Al the cash that does not flow to the foreclosed home mortgages finds its way to Bed Bath and Beyond and elsewhere.

When we hit the wall, 666 will be a blessing. Think 333

 

Thu, 04/07/2011 - 22:46 | 1148141 walcott
walcott's picture

silver about to rip right through $50 spot. That means $55-60 for physical!

Thu, 04/07/2011 - 22:47 | 1148150 long juan silver
long juan silver's picture

It means nothing of the kind.

Thu, 04/07/2011 - 23:13 | 1148258 High Plains Drifter
High Plains Drifter's picture

but, but , but , silver is a industrial metal......

Thu, 04/07/2011 - 22:50 | 1148155 franzpick
franzpick's picture

Late-night escape in last 2 hours:  WTI 110.91, Au 1463.90, Ag 39.83

Thu, 04/07/2011 - 22:50 | 1148164 holdbuysell
holdbuysell's picture

Is there an assumption in here that those who bought commodities would flee to a different store of value?

Thu, 04/07/2011 - 23:23 | 1148310 Cole Younger
Cole Younger's picture

" fast-growing emerging market economies"

Nothing is growing except the debt and the feds balance sheet.

Thu, 04/07/2011 - 23:26 | 1148338 antidisestablis...
antidisestablishmentarianismishness's picture

50% drawdown, no problem, real men never abandon the ship.

Thu, 04/07/2011 - 23:41 | 1148402 6_7_42
6_7_42's picture

ag $39.96 @ 20:40 PST...guess they're liking the white metal in Mumbai.

Thu, 04/07/2011 - 23:52 | 1148451 RockyRacoon
RockyRacoon's picture

Some thorough work.   I just had a deja vu moment and thought I was back at the old ZH where serious work was welcomed.

Shame you Turd for your blah, blah, blah comment.  I'm a silver/gold lover as well but the sun will still come up if it corrects.   If it does, there will be reasons, and that's where the article is helpful.

Thu, 04/07/2011 - 23:55 | 1148453 Elmer Fudd
Elmer Fudd's picture

f*n paper traders...

Fri, 04/08/2011 - 05:52 | 1149077 tomster0126
tomster0126's picture

It doesn't matter how far down the horizon it's going to be gone, from here on out the prices are not going to fall, and we need to create a new infrastructure.  Let's legalize industrial hemp for one thing, and get some massively produced and efficient solar cars in the works.

 

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