Investor Contributed Research edited by Financial Trader Research inc.,

Acceleration

by Phil Volkoff, 2-27-10

Acceleration:   the rate of change of a moving object;   applicable to financial indicators.

Acceleration is the word that jumped into my head over the last week for some of the salient market indicators that I scrutinize and watch.  As a follower of Elliott, the market is simply a proxy and gauge of social mood similar to a thermometer that shows one the temperature. When the collective mood of society is positive; markets move higher, and when the collective mood is negative; markets move lower.

The first indicator that jumps off the page was February's consumer confidence which plunged to 46. This blew the bottom out of the consensus range of 52-57. Also, part of this indicator is the expectations component which had a sharp 13 point fall to 63.8 and the present situation component, reaching levels seen in the severe recession of the early 1980's at 19.4, a sharp drop of 6 points. Out of Europe you had a surprise drop in the German IFO business sentiment index from Jan 95.8 to 95.2 and lackluster retail sales out of France all blamed on the snowy weather. In the UK, broad money supply turned negative and officials said that exports to Europe were weak.

Back to the USA, new home sales for January took the bottom out of the consensus range of 345k-381k coming in at 309k and unemployment claims came in at 496k versus consensus of 460k.  Today Feb 27, the Rasmussen Presidential tracking poll shows Obama and Congress at or near all time lows. All of these statistics are volatile and subject to revision, but when I see acceleration away from the consensus I take notice. To me, these stats along with contracting consumer credit in an economy 70% based on consumption, widened credit spreads, and an extremely steep treasury yield curve, which I believe economists are misreading as a sign of growth instead of a worry about the deficit, tells me that we are headed for trouble, and not a sustained recovery.

In a credit based economy confidence is everything. People are becoming aware of the huge dilemma the states and sovereign countries face in trying to get their out of control budgets under control. What is in the near future are more job cuts and higher taxes and all very negative for confidence.  Meanwhile , diverging from all of these stats is mutual fund cash levels which are at market extreme low levels. I believe these low cash levels are a real negative, because of the reduced buying power left to support the equity markets.

On another note my year ended this weekend and I am down about 4%, remember my year runs March to March. Fortunately my March 08 to March 09 performance was much better up 9% when a lot of investors were down big. I am fairly optimistic about this years results. I think there will be some exceptional moves in the markets to profit from the bearish side. I am long the dollar with DRR and UUP, long 5 year ,3 year, and 2 year treasuries plus short the European stock indexes with EFU .
 

Of Cockroaches and Bankers

by Phil Volkoff, 2.19.2010

As any longtime resident of NY City could tell you--25 years in the big apple-- find one cockroach in your apartment during the daytime and you can rest assured once it's nighttime the little critters will be out in full force.

Like bankers these little creatures thrive in the darkness.  Turn the lights on and there gone in a flash. For example, take the trillion dollar derivatives market which operates in the opacity of the OTC market.  We were honored with a glimpse of the little 'nasties', over the last year and a half, and how these derivatives can go terribly wrong.  Some of these products are designed to hide the true state of an entities financial health: think Enron.  Recently, the concern and outrage has been directed at Greece and their little loan from the bloodsucking vampire squid (GS) which was designed to look like a currency swap. 

Lets just say this little swap made Greece's finances look a lot better. So today the talk was Italy. Word is that they might have some of these same swaps lurking on their books. But if you understand the nature of cockroaches you shouldn't be surprised that another country has been infested. And I'll really go out on the limb and say that Greece and Italy won't be the last countries either. Not to pick on Europe, but right know it's in vogue.  Don't worry though, the U.S.A will not be out done. We have our next disasters festering in the trillion dollar municipal market. So for now the show is in Europe, but I promise it will be coming to the U.S.A because there are just to many cockroaches running around.

Phil Volkoff

Bear Market Awakens

by Phil Volkoff, February 15, 2010

I have been in hibernation since my last update which was 10-04-09. I have engaged very few directional positions and have just patiently watched the markets run while waiting for a high probability setup that the markets were indeed finishing their respective counter trend bear market rally. As some of our past readers my recall, I am an Elliottician , and thus I was looking for a completion of the primary wave 2 bear market rally from the March 2009 lows before jumping on the primary wave 3 move down.  Odds favor that the week of Jan 11, 2010 was the top of primary wave 2, which means that a devastating resumption of the long term secular bear trend that started in 2000 is now  resuming, again.

I barely participated in the counter trend bear market move up except with my long natural gas position, which was a loser. On the week of Jan 11, I officially came out of hibernation and became very active in the markets. I liquidated my natural gas position which put me down 8% for the year.  My year runs March 2009 to March 2010. I got out of natural gas because my fear is that this wave 3 down will be so devastating and deflationary that it will take commodities including natural gas down.  I extended my U.S. Treasury Bond position from 2 years out to 5 years and got short the euro using the double short ETN, (DRR),  plus I got long the dollar using the ETF (UUP).

As some of you may remember, I was one of very few dollar bulls in existence last year.  In past posts I was looking for the dollar to rally and stocks and commodities to tank.  As of the week of Jan 11,  I believe the stock market completed its counter trend move, which was a triple three, and the dollar bottomed in the middle of December.  Now the dollar is leading the way down for stocks and commodities.  As I mentioned, wave 3's in Elliott is the wave of recognition. People are going to finally recognize that the government cannot bailout all the bad debt that was underwritten; from bad municipal debt to bad sovereign debt.  I've been waiting to trade in the direction of the secular trend since October by just sitting on my hands. I am now positioned short the S&P with the double short ETN (SDS), long the dollar with UUP and DRR and long cash 5 year Treasury Bonds.  I am only down 3% now and have plenty of ammo to make money with the new bear trend. I'll be posting again when I have some strong opinions to pass on.

Bear Market Sooner than Most Think

by Phil Volkoff, 10.4.2009

"The central fact in all depressions, as well as in those crises which are followed by depressions is the condition of capital.  These disturbances are due to derangements in its condition which, for the most part, assume the form of waste or excessive loss of capital, or its absorption, to an exceptional degree, in enterprises not immediately remunerative. In some form or other this waste, excessive loss, or absorption, is the ultimate or real cause."

Quote from Financial Crises and Periods of Industrial and Commercial Depression, by Theodore Burton first published 1902.

So here we our, the Fed and Treasury giving each other high fives for saving the day, yet all they have done is miss allocated more capital from the taxpayer and concentrated risks in too big to fail banks.  Nothing has been done to diffuse the bomb, just an extension of the fuse.
 

Financial System Nearing the Cliff

In Elliott wave analysis, all price targets as well as wave structures have been met for primary wave 2.  Important cycle highs have been met.  The financial system is in a much more precarious position then before the crisis with increased leverage and concentration of risks in too big to fail institutions.  The government has reached a point where it will have a problem borrowing for the next round of coming bailouts.  The tsunami populous backlash to anymore bailouts because of the blatant abuses by banksters, and the futile releveraging of the governments balance sheet (to revulsion levels) to take up the slack of credit expansion from the private sector, and the consumer which has imploded, will completely impede anymore rescues. Real wages have been declining since the late 1970's.
 

The Wave of Recognition (Bear Market)

The great Wall Street bubble machine that provided financing to keep living standards rising through debt for the masses whose incomes were actually falling is broken. There will be very little job growth in this recovery; just a statistical bounce in GDP.  In Elliott wave parlance, primary wave 3 will begin soon: the wave of recognition, where all this leverage will be recognized for what it is, A Giant Ponzi Scheme.

Positions

Still hiding out in 2 year treasuries at 95% of the portfolio plus HNU.To at 5%.Still down for year at around 5%.
 

Conflicting Signals

by Phil Volkoff,  9.14.2009

As I mentioned several updates ago, I liquidated all positions except HNU.TO which is 4% of the portfolio, and put 85% in off-the-run 2 year Treasuries placing the remainder in money market funds.  When I see conflicting signals I'd rather sit out market risk. 

The first conflicting signal is coming from Dow Theory which has a buy on stocks, but as an Elliottician I have wave patterns that appear to be concluding a primary wave 2 correction, confirmed by the renown Elliottician,  Robert Prechter.

Also, credit spreads--which I pay a lot of attention to--have been the tightest to Treasuries since Lehman collapsed, which is bullish for stocks but short term Treasury yields are grinding lower; a bearish signal.  In addition, bullish sentiment remains in the high 80's on stocks which as a contrary indicator is bearish not to mention the negative momentum divergences and cycles.  Yet, stocks continue to grind higher. Thus, I'll sit on my hands here.

Last week's post on Nat gas mentioned that we might be seeing an important low.  Looking at the commitment of traders report the large specs are short, and with the enormous open interest bulge we have a potential powder keg. Normally, I like to fade the retail trade but retail tends to be 'buy and hold' and large specs have trading hair triggers Retail is long natural gas in the ETF UNG,  which is a large percentage of the front month futures contract open interest.  If the large specs, ie hair triggers, try to cover there are not going to be many sellers down here.  Today, Goldman said that Nat gas could triple next year, which I have mentioned could happen in previous posts.  With the calendar for nat gas becoming more normal starting in Nov. I am willing to add HNU.TO as I did today at 2.5.  Currently, the portfolio is down around 5 1/2 percent for the year that began in March.

Awaiting The Equity Vortex, Dollar Rally, & Natural Gas

The last update I posted on natural gas was 7-26-09.  I was looking for a new low then, but I am the first to admit that I didn't  think it would be this low. The problem with ETF's and ETN's when picking bottoms are the rollover costs because of the huge contango in the calendar spreads, which makes buying HNU.TO and UNG a tough play right now.  In addition, we need to deal with the negative compounding from up, and down movements which obviously hurts prices.

As I am writing this update, Nat gas is down over 20 cents with the Oct. contract around $2.50 and Nov. at $3.66, a huge 40% premium.  I need to see some of this spread come out before I add anymore HNU.TO.  This morning spot natural gas was trading around $2.00 at the Henry Hub.  With the roll coming up for HNU and especially UNG in the coming week and a half it will be interesting to see if the front OCT contract, which needs to be liquidated, holds around long term Elliott wave swing support of $2.00 where the 12-15-05 high of $13.65 to the 09-29-06 weekly low of $4.05 equals the same move from the 7-04-08 weekly high of $13.69 down to around $2.00.  This completes a C wave and 5 wave movement down from the 7-04-08 weekly high.

What I would like to see is the front October 2009 contract hold around $2.00 and the November 2009 contract melt towards $2.00. This would tell me that arbs are willing to buy and STORE the front month because they can hold for a month and deliver into the Nov contract, which now reveals a huge 40% premium.

Part of the fear in the market is no storage, thus the huge contango. So, if the Oct/Nov spread starts to really narrow and Elliott swing support of around$2.00 holds plus the impetus of strong seasonals for September lows we may have the making of a long term low.  But how to play this move without getting crushed from the roll?  I am not going to buy until I see the spreads narrow which would tell me the market is clearing and probably reaching a low.

For the record, I liquidated all positions except HNU and went 85% into 2 year cash Treasuries waiting for the dollar to turn up and stocks to crater.
 

by Phil Volkoff, 8.24.2009

Was working on set all last week filming. Some brief observations and updates:

Lots of negative noise on the U.S. dollar from Buffett and Gross which sounds to me like they were talking up their book. I added UUP to my long dollar position; an ETF designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

 Prechter has called a bottom in the dollar so I have interesting company here.  Today (8.24.2009) I put 2/3 of the account in off the run 2 Year Notes at 1.19%. Remember, these notes should perform very well when primary wave 3 kicks in, the wave of recognition, to the downside. I can't come up with a scenario where job growth is going to support this economy.  Consumer credit continues to collapse which is bullish the dollar as credit dollars shrink.

by Phil Volkoff, 8.9.2009

My fundamental premise, which is secondary to my technical bias, states that the economy will demonstrate a false bottom, which the stock market is discounting as "the bottom" in a primary wave 2 up, thus performing as the bottom were in. Once the market figures out that it's just a shiny new paint job on a rotten structure the primary wave 3 will dominate.

Remember, the wave of recognition means no long term recovery. However, Friday's unemployment number coming in better then expected, (a real dubious number with seasonal adjustments and birth death model disinformation) raises the question, is my fundamental view for a dollar rally against the euro built on the wrong fundamental premise?

The bonds acted as if there is future tightening with the 2 year note future breaking below the 108 area of support, and credit spreads tightening to pre-Lehman Bros. implosion levels. The dollar no longer sold off on good news, as the talking heads see the dollar falling because risk appetites are increasing on stronger fundamentals. So what's up? One of the most important pieces of the puzzle that helps confirm my technical bias is good news, very poor price action.

As I said in last weeks update, I was looking for a miserable failure in the Euro rally... and we got it. Both the Euro and the Swissy put in reversal bars as I predicting and failed outside of the range setting up for a possible upthrust reversal where you break out of a range and then trade right back into the range.  If the markets take out the other side (support) suddenly you have a great sell signal to take advantage of.

The hydraheaded pieces seem to be in place for a huge $U.S. dollar move up against the Euro as follows: one sided negative sentiment, negative volume, open interest, and momentum and a complete wave structure out of a terminal triangle pattern.  In addition prices are mapping directly into long term fib resistance and retracement levels with a complete wave pattern, and finally good news bad action for the Euro bulls.  So is my fundamental view wrong for a dollar rally?

In my methods the technicals rule over fundamentals; however, I do believe that the markets fundamentals will reveal the story, once the dollar starts rallying, that Europe is behind the U.S. in recovery and that will be the talking heads new reason for the dollar to rally.  So relative to Europe,  the U.S. is in a classier section on the Titanic than Europe. I thought the kick off to the dollar rally would come on negative news instead, but instead it came on good news which makes me wrong, but what a great confirmation for my technicals:   good news poor price action.

If the dollar low is in, it will be interesting to see how the stocks and commodities react since they have been trading inversely. I am still holding core shorts in the Euro and European equities, and long natural gas HNU.TO. I am still down about 3% for the year which runs March to March.

Getting Technical

by Phil Volkoff, 8.1.2009

Corrections are notoriously difficult to trade. In Elliott theory there are 11 different types of corrections:  from zig zags, flats, triangles, double and triple three's and their myriad variations. For example, you could have ascending, descending, contracting and expanding triangles all within the category of triangle. Phew!
 

What it all Means

So how does all this fit into what's happening in the markets? We are experiencing major corrections in most markets.  I believe that the dollar will be the answer  when the tsunami change in trends occurs, which will kick off a primary wave 3 decline in stocks that will be a multiple of the primary wave 1 decline from Oct-07 to March-09.  Very big moves indeed. As this crisis of credit has been unfolding, the dollar continues to correlate inversely almost 1:1 versus stocks and commodities.

Rationale

Correlation doesn't always mean causation, but in this instance I believe there is a direct relation. Let's just say it is the ebb and flow of liquidity thru the system. 

Right now stocks are coming into a cluster of various resistance including cycles, and relations that could pause, end or accelerate the trend higher.  Sentiment is not extremely one sided bullish, which tends to show up at major trend changes.  This means that stocks could continue to grind higher in the near term. However, as I mentioned earlier, I believe the dollar holds the key to the major trend changes for the markets.  My analysis focuses on the Euro since I am long the (DRR), double short Euro, and the Euro is a large component of the widely followed dollar trade weighted currency index.   The Euro traded from an April-08 high of 1.5988 to an Oct-08 low of 1.2362 which was a 5 wave impulsive decline.

As I mentioned in last weeks update, the Euro was getting ready to accelerate up out of a triangle which in Elliott is an ending pattern.  But I mentioned that  I was seeing negative momentum, volume and open interest divergences. The euro tried to accelerate out of the triangle, then sold off to the apex, and then advanced sharply up to overhead resistance on Friday.  Some currencies made retracement highs and others like the Swissy and Euro stayed within congestion.
 

Euro Vulnerability

The Euro needs to get going  this week because the odds are starting to stack up against it.  If we continue higher out of this triangle, think ending pattern (termination). We run into .618 resistance @ 1.4602 and a potential double top at 1.4687 in the Euro. Sentiment remains extreme against the dollar similar to April-08 which kicked off a 36 point move down in the Euro. I also show large increases in open interest on the currencies at an important inflection point, which means that large bets are being made in the futures market and as a proxy in the giant cash markets. What I could see happening this week is a spike up to the .618 retracement and potential double top area and failing miserably, thus giving us a big reversal bar. Big trend changes tend to occur with high volatility.
 

Analogue

I use the analogy of a sail boat changing wind direction. As the sail boat turns into the wind the sails buffet back and forth violently until the wind catches the sails just right and the boat turns direction. So if I am right, the trend change in the dollar will lead the trend changes in the stocks and commodities and perhaps all smoldering around a lot of volatility

Deficits Don't Matter

By Phil Volkoff, 7.28.2009

Gee, look we can sell over one hundred billion in debt this week and look how low the rates are...3.70 percent for ten years!  As some  past, wise U.S. leaders have proclaimed, "deficits don't matter".  Yet, all that keeps going through my head is an article I read this week on Bloomberg saying that the U.S. has the highest real rates since 1994 (around 5.10% on the 10 Year Note).

Normally, in my experience real rates usually average around 2.25% to 2.75%.  Having real rates this high with imploding debt creating deflationary pressure is like adding lead weights to the chest of an emphysema patient.  This is the ultimate crowding out. 

In order to finance such large sovereign debts  governments around the world need to compete against each other to offer the highest real rates. This means that money is going to be sucked out of many productive investments to finance dead money. This is poison for stocks and commodities and very bullish for the dollar.

Just think of the U.S. being a giant vortex sucking money in from any investment that can't give a so called risk free return of 5%. Very scary!

Phil Volkoff

Risk Management Now

7.26.2009, by Phil Volkoff

The Macro View

So earnings were great?  Lower the bar so an infant can crawl over it and suddenly...earnings appear fantastic.  Cut enough jobs fast enough and you too can have a great quarter.  So what if top line growth at many firms spiked down 20 to 30 percent.  Ship some more jobs over seas, I say, and cut, cut, cut until there are no more customers left to service the debt bubble and buy ones products. 

Equity investors need not worry about more crises brewing, no potential for job growth, commercial real estate and construction loan ball and chain on regional banks balance sheets and the coming European banking debacle brewing. 

As a technician the technicals rule for now and what a mother of all short squeezes we have going on.  As an Elliotician comment, it is not uncommon for bear market rallies to retrace anywhere from .382 to .618 of the prior wave, in which case your talking the October '07 highs to the March '09 lows, which is a primary wave 1 decline.  Currently, we are making a primary wave 2 correction up. If you do the math that could take the S&Ps any where from the low 1000's to the 1200' area, which by the way is significant resistance.

So how do I make money?  My year runs from March to March and I am now down almost 3%. Last week, for money management purposes, I lightened up on my European short, which is EFU to 5% of my portfolio.

Elliot Wave Findings

I want to maintain a core short position because I have a very strong conviction that once primary wave 2 is done we will see wave 3 which is known as the "wave of recognition", and it should begin with a bang. Why the wave of recognition? Because it will be so clear to everyone that the system is so broken that you can't unwind a massive 30 plus year debt bubble in 2 years.  This wave 3 will be a Fibonacci multiple of wave 1:   pure panic material . So in order to live and fight another day I reduced my FX Euro short position, DRR, to 20% from 30% of my portfolio. Technically the euro is breaking out of a triangle, which in Elliott terms is considered an ending pattern but does not mean the Euro couldn't trade up to 145 before it tops.  However, normally you rocket out of triangles and that's not happening here.

Technical Analysis

My volume and open interest and momentum studies look bearish, plus you had what in the past would have hurt the dollar; rising stocks having a limited impact . This should be a make or break week for the Eurobulls.  The euro has been riding up it's 21 day moving average but not taking out long term resistance.  If it doesn't get going soon it will fall back.  If so, and the market takes out the apex of the triangle one can have an explosive move to the downside. 

HNU.TO

Natural gas bounced last week and the count is looking clearer. It appears we are making a little wave 4 rally and may get one big wash out down in a wave 5 before this bear market is over.  On a big wash out lower, I will be adding more HNU.TO to my position. I think over the next 2 years natural gas will be a big winner, but just not yet.

7.19.2009, by Phil Volkoff

No Market Mystique, Just Method

IIt's the weekend, and I am reflecting on the past week.  As I mentioned in my last update, there were 2 possible outcomes for the major indexes.  The first was the break of the neckline and an acceleration down in a wave 3; or a possible zig zag and then a rocket up. We got the latter, but with various indexes making notable divergent highs for the week. 

The possible wave count that I am looking at for Europe is a 1 down followed by a sharp 2 up with a sharp wave 3 down.  Here, I want to explain a little bit about how I look at the markets.  I take a long macro look at the markets and try to identify trends that might be developing where I can hold positions for a long time and trade around them in the short run.  I see the equity markets in a long term bear market.  Why buy the stocks when you can buy their bonds and lock in a nice yield?  I always look at cash flow to determine actual investment value.  

As an example, I recently bought a home in California after renting for six years because it's much cheaper for me to own now then to rent.  No way am I calling a bottom in real estate; its still going lower, but in the long term I've locked in cheap payments.  

I am long natural gas because there is a glut that built up from last years bubble and once worked off natural gas will go much higher because its too expensive to drill new wells.  Remember, think cash flow.  This crisis is about credit, and drillers are not going to be able to get financing when it makes sense to drill, thus, we're setting up for our next shortage.  On an Elliott wave perspective, we are very close to a long term bottom in natural gas, which could mean a tripling in price over the next 2 years.

Cheers, Phil Volkoff

Talking the Market Up?

by Phil Volkoff

7.11.2009

All the talking heads this week became armchair technicians discussing head and shoulders patterns with contrarians saying that because everyone is seeing them they won't work.  That is why I love Elliott wave analysis since it demonstrates whether or not a pattern is truly a head and shoulders pattern which would be a one two count for equities with two being the final shoulder with an impulsive 3 and 5 to follow, or a zig zag which is just  just a correction of the uptrend which breaks the neckline, gets everyone short, and then rockets to new highs.  I feel strongly that the European indexes are in impulsive moves down but I am not as confident with the U.S. indexes at this juncture.

Last week I took profits on my DTO position (risk management) which was double short crude even though it will probably go lower before sharply higher. I am still long SDS but will roll that into more EFU next week and still long HNU.TO .I  am still looking for a sharply higher U.S. dollar versus the euro and I am starting to get good confirmation on that trade from some of the peripheral currencies such as the Australian Dollar, Canadian Dollar, New Zealand Dollar, and British Pound all starting to break down.  Commodities are looking weak and bonds are rallying:  clearly, the recovery is questionable despite the talking up by the talking heads.

by Phil Volkoff

7.4.2009

Looking at the last two weeks of trading in the U.S. dollar, crude oil, and European indexes we see that all of these markets created counter trend technical flags.  A flag can be characterized by a tight rectangular area counter to an impulsive move, which usually appears about half way through a trending move.  

For clarity, if you look at a daily chart of the German ETF (EWG), our proxy for the Dax index, you'll see a clear rectangular formation rising up after the low made on 6-22-09 which marked a low after a five wave move down from the $20 area.  In Elliott wave terms, this is a wave two countertrend rally from the $20 bear market rally high.  If this analysis is correct, we should start to see a powerful wave three down of a bigger wave five which should take the European indexes to new multi-year lows. 

My wave count is the same for crude, which is also down.  Looking at the dollar long position I am still really bullish the green back.  My count shows a one and two wave already completed and if this analysis proves correct the impulsive wave (three) should follow relatively soon.

My June performance for the Volkoff fund is down 3% which puts my performance flat for the quarter since I started the maiden voyage here in late May, 2009.

Have a great 4th, Phil Volkoff.

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