Value of Perfect Information

Readers of the last 4 articles (since Jan 4) were given several technical and fundamental argumenst calling for more declines in EURUSD. Here’s another one, with a touch of gold. Last week, gold hit a new record high in euro terms, highlighting the latest weakness in the single currency rather than gold’s improved lustre. Analysing gold’s movements against various currencies is not only crucial in weighing the true performance in the precious metal, but also important in valuing a currency’s secular movement (rather than comparing it to other currencies). Thus, figuring out whether a falling EURUSD is a result of broadening euro weakness rather than a strengthening USD can be addressed via golds multi-FX analysis.

The first chart shows weekly gold in USD terms suffering from classic bearish case of lower highs i.e. failed rebounds. The $1,225 record high from December 2nd coincided with the same month of the higher than expected US November jobs report and the triple downgrade of Greece credit rating from Fitch, Moodys and S&P. As long as gold fails to regain $1,133 (50% retracement of the decline from 1225 high to 1043 low), it remains vulnerable to $1,020 (target by Mar 6^th), followed by $980. Our long-term bullish stance in gold would only be reconsidered in the event of a break below $880.

The second chart shows weekly gold in EUR terms reaching a new record high of EUR 831.00 Since this occurrence is primarily EUR-driven move, it merits more attention regarding its implications for EUR rather than gold. We would only start to focus on golds strengthening trend when it nears its highs vs. the stronger JPY and AUD as was the case in early December.

The third chart shows eroding interest in gold net longs (positioning of futures contracts in NY Mercantile Exchange). Last week, net longs rose for the first time in 5 weeks after having fallen to 181,519 contracts, the lowest since September. Since December, falling net longs were more a case of a decline in new longs rather than an escalation in fresh shorts, which is unlike in Q3 2008, when golds decline was prompted by surging shorts as a result of the great unwinding trade. Reconciling golds robust performance against EUR and the fading interest in gold net longs (vs. USD) justifies our bearishness in EURUSD as well as anticipation of further losses in Gold/USD. Technical analysis of golds net longs suggests the decline will retest the 130K level from the current 188K.

Fed Chairman Bernanke will likely use this weeks semiannual monetary policy testimony to tone down any overshoot in short term yields by reiterating exceptionally low levels of the federal funds rate for an extended period, but that will likely fail in dissuading USD bulls, especially as bond traders anticipate payment of interest on reserves as the Feds next step of exiting its liquidity strategy.

Dead Cross on Gold

And those who became familiar with the meaining of DEAD CROSS formations, Daily gold sees its 50-day MA falls below its 100-day MA. Readers of this site were warned on Jan 19 about the dead cross in EURUSD (50-day MA falling below 100-day) 23 hours before it occured. 18 hous later, EURUSD lost 210 pips.  3-year Anniversary of the Pre-Crash Correction  February 27 (marks the 3-year anniversary of the 1st correction in global bourses, which wiped out nearly $600 billion in market value, triggered by fears of higher transaction taxes in China, an expected plunge in US durable orders and preliminary fears of US subprime debt. The Shanghai Composite plunged 10%, NASDAQ fell 4% and DJIA dropped 3%. While the global patient has shown marked signs of improvement, it remains highly vulnerable to multiple sources of contagion (Eurozone fiscal woes, Chinese tightening, rating concerns in Gulf & pace of liquidity reduction by Fed). Pay attention to recurring cycles and repeat events.

Canadian dollar falls across the board as markets unwind gains in commodity currencies ahead of potential event-risk from Bernanke’s testimony. CADJPY bearishness was highlighted by negative crossover in the stochastics, losing 270 pips since Monday’s tweets and IMTs. Subscribers to our IMTs and Twitter.com/alaidi were initially warned on ensuing CADJPY bearishness on Monday when it stood at 87.70.

USD Daily:  MA 50 crosses above 200, MACD well above zero, AROON trend up and support at 79.50.

USD Weekly:  EMA 10 supportive, MACD on verge of big time bull signal and AROON trend up.

USD Monthly:  Dealing constructively with strong resistance, MACD okay and will be flat out bullish if it gets above zero. AROON trend up.

So tell me, where are the ‘Dollar Collapse’ cultists now?  You know, the smart guys making a living out of touting the destruction of this intrinsically worthless currency in favor of other more ’sound’ currencies?  Give me a break.

It’s all a confidence game and right now confidence is ping ponging around the globe from the trying to be all things to all people debt note in Europe, to the reserve currency debt note of America to the commodity/resource currencies of Australia and Canada.  FOREX jocks are having a blast but most Americans probably think the dollar is still in the tank.

The boring old blogger will simply remind that it is long past time to begin securing your future against these rackets

Summary Opinion: It looks like the market wants to move up (sans an exacerbating Sovereign Debt Crisis) and at least retrace a healthy portion of the move down.  Of course we could always chop in a range (and or sell off) until the Greece situation (along w/Spain and Portugal) finds a resolution (lest we forget China’s steps to curb lending); but for now, I’m more apt to cautiously subscribe to a continuation of the recent bounce.

Weekly ES Profile 
In the very short term, it looks like the 1065 and 1085 zones hold the majority of importance for now. 

Relative Strength.  
The Russell 2K, Homebuilders, Health Care, Oil (not shown) and the 10 Year Treasuries (not shown) have been showing notable relative strength during the recent market activity. 

Relative Weakness
The SPYs (relative to the IWMs and Qs), Financials and Utilities have been lagging the recent bounce.  Financials have often been the last core sector to join the intraday rallies of the past few days. Specifically, JPM, BAC, WFC, etc, have been showing relative weakness. (p.s. I usually don’t trust the XLFs performance alone.  I often scroll through the major and regional banks to get a better feel for the sector.)

Note: Be sure to check out MACD’s readings on all of these charts.  While it looks promising for a continuation upwards, I am reminded of the saying, “When everyone is thinking the same thing, no one is thinking”.

I like this count and it is reinforced by my ever expanding data and need to attain that “Value of Perfect Information”
Utilizing the information directly from S&P that can be found here:
http://www.standardandpoors.com/home/en/us/
Then click on the images below to see how to get to the excel spreadsheet after you register with S&P
Ok so how did I get to 1250 which should happen very soon with the exceptional good earnings reports coming up that I anticipate.
Ok.. look at the column that says Operating earnings bottom up for 2010 which adds up to $76.47 (this number is continuously changing as the earnings are fine tuned)
Bottom up:S&P covering Equity Analyst estimate for specific issue, building from the bottom up to the index level estimate
Top down:S&P estimate (Economics Dpt) incorporates models (economic, financial, policy), does not come down to issue

Over the last 20 year period the index traded at an average of 19.4 times earnings, but you have to discount that because it included a 12 years bubble; so taking a longer term average of around 15 times earnings is more realistic.
For the past 100 years the S&P 500 P/E multiple has been 16.37 times the trough earnings.
So taking $76.47 x 16.37.. and presto you get SP500 at 1251.

I have done a post in the past regarding operating vs reported earnings.. operating is what the bulls like to use…
The “As Reported” number tells us a lot more about the slings and arrows the company endured during the reporting period while the Operating earnings number tells us more about their gross earning power
When you hear the word earnings used by analysts, you need to understand the difference between the two types; “operating” and “as reported”.
When calculating the Price Earnings Ratio (P/E) for the S&P 500 or any stock for that matter, the E in the P/E is vulnerable to major manipulation because the accounting method used to derive the earnings can be misleading to say the least. The S&P 500 P/E ratio reflects the performance expectations of the stock market.
Just remember this:
Bulls use “operating” earnings which are inevitably higher
Bears use “reported” earnings, and as such, are inevitably lower

Bulls use forward “operating” earnings for the next 12 months.
Bears use the past 12 months of earnings to make their case. The advantage of that is obvious: it avoids the dependence on estimates of earnings going forward.

The all important major difference?

Bulls use “operating” earnings which exclude write offs.
Bears use “reported” earnings which include write offs. As such this is by far the gold standard or interpreting earnings because these write offs that consist of miscellaneous non recurring one time charge and expenses typically take place almost every year.
You might ask… well why isn’t Ben utilizing the data for reporting earnings! Simple! Because today and for this week I want to have my “Bull Cap” on!

The bulls use “operating” earnings which are also known as “pro forma” earnings
So the bears use “reported” earnings which is based on Generally Accepted Accounting Principles or “GAAP”

And this is how we get such a huge discrepancy between the bulls and the bears.

Two charts shown previously, that have been stored and updating.

The retreat in the inverse correlation between oil prices and the US dollar is set to continue into the quarter, with the US currency seen adding on to its gains despite robust energy prices ahead. Dollar strength is set to specifically emerge against the euro and the British pound. Since the euro accounts for 58% of the weighing in the US dollar index and EURUSD pair makes up over 25% of the average daily turnover in the foreign exchange market, we focus on the EURUSD pair in detailing the relationship between the USD and oil.

Fundamentally, the euros 5% decline in December against the dollar may have been accelerated by year-end squaring of positions, but the dollar and euro sides of the equation also played a role. Sovereign credit rating deterioration in Greece and Spain as well as lack of fiscal progress in France and Italy (as demanded by the Maastricht criteria) are set to hamper any exit strategy from the fiscal side.

Meanwhile, the recent pace of improvement in US jobs market has forced a repricing of fed funds expectations to the extent that US 10 year yields have broken away from their German counterpart, pushing the US-GE yield differential to +40 bps (in favour of the US), the highest since July 2007. The resulting withdrawal of liquidity from the Fed, as it modest as it may be, will likely maintain the yield differential in favour of the USD, thereby, offsetting steady energy prices in Q1.

Oil-Euro Break: Deja Vue

Integrating oil into the equation, the weakening of the once highly positive correlation between EURUSD and crude continues, but this time reflecting higher oil & lacklustre euro (instead of rising euro & falling oil during Nov-Dec). The December rally in oil despite the euros selloff has continued into this week and is expected to persist for most of Q1. Such pattern has already occurred in June 2003, January 2004, January 2005 and April 2008. Although oil has yet to break above its $82 high, we expect prolonged advances towards $89.90 by February.

Technically, euro bulls cannot ignore the time-tested fact that monthly downward reversals greater than 4% have led to multi-month declines of at least 15% since the inception of the currency in 1999. The December decline of 5% (biggest since Jan 2008) is likely to reinforce our forecast for $1.37 before quarter end.

USDJPY and GBPUSD remain on course to hit the targets projected in last month’s article. 93 yen is likely to pave the way for 95 but not without interim retreat to as low as 90.20s as the yen regains some short-lived lustre from an upcoming market pullback of no more than 7%. As USD picks up the mantle of next risk aversion from JPY, GBPUSD is likely to accelerate losses towards the $1.57 figure. But broader USD strength will be needed to achieve $1.55.

Today the Institute for Supply Management (ISM), released it’s December manufacturing survey results and the markets jumped. Here’s what I read on the Econoday summary for today, “Growth in the manufacturing sector is accelerating quickly, according to the ISM report which opens the New Year on a strong economic note.”
I’m no expert when it comes to how these reports are procured, but I don’t think those numbers are derived from success within the US. The ISM chart shows manufacturing at higher levels than when we went into the recession in 2007. Productivity means jobs…where are they?
All is not well with commercial loans. Loan default rates continue to increase in all areas except credit cards which have leveled off. The default rate chart shows data up to September 2009.
We won’t see 4th quarter results until March if we’re lucky. Why do they wait so long to release the data? Ask the Federal Reserve. Ask the Obama administration. During the Bush administration I could go to the White House website and view monthly default data. Now we just get fluff: http://www.whitehouse.gov/
If a reader knows where monthly default data is available please leave it in the comments section. Thanks!
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good luck,
Mark
Content on CEO Trader is opinion only, please trade at your own risk.

I want to be clear with regard to my usage of TICK*, Momentum, Delta, and Moving Averages :  When these indicators all ’speak’ a similar theme, I consider them to be of ‘value’.  However, when taken in abstraction, their ‘value’ is reduced considerably .

(*Note: TICK can be used as both a momentum and sentiment indicator.  Today, I was referring to TICK as a momentum oscillator.  )

I’ve found that when you can confirm four or five other plausible strategies at any one time, the odds of a successful trade increase greatly in your favor (especially when higher time frame participants are engaged)

The US dollar builds on its newly acquired robustness amid the FOMCs modest economic upgrade with regards to labour markets and the reiteration of the Feb 1st 2010 deadline as the expiry for the various liquidity operations. Although the FOMC statement maintained the phrase exceptionally low levels of the federal funds rate for an extended period, the overall tone was more than sufficient for the greenback to extend its upward trajectory, especially amid the rapid concentration of Eurozone-centric credit and banking problems cast a pall on the non-USD block.

Considering that the balance of recent US data has tipped in favour of the US (employment, retail sales and CPI), dollar bulls will content themselves with the slightest of modest of hawkish/ commentary from the Fed. Wednesdays FOMC statement was a simple step in the Feds challenging task of normalizing liquidity and credit markets amid an environment of rising yields and consolidating equities.

The combination of negative event flow in the Eurozone, year-end window dressing operations reducing USD shorts and a USD-favourable yield gap will prolong USD gains into mid Q1 2010, especially amid no prospects of a fast resolution in the Eurozone sovereign problems. Consequently, EURUSD hit the $1.4280 target issued at the Dec 10 HotChart after the pair exceeded the magnitude of its 2 prior down cycles. $1.41 should likely emerge as the next support level, but $1.38 appears to be a sturdier foundation.

USDJPY Eyes 93

It is time for JPY to take a temporary a break and allow the USD to draw most of the risk aversion plays at the next round of risk pullback. Two weeks after the Bank of Japan was pressured by the MoF to inject extra liquidity aimed at stabilizing yen strength, the central bank today altered its definition of price stability to include only positive price growth, instead of the previous definition of zero-2% annual growth. By announcing its intolerance for flat consumer price prices, the BoJ is set push against a resurgence in yen strength.

Accordingly, we would expect USDJPY to regain 92.50 until it encounters the next resistance at the 2 year trend line on the monthly chart below. Subsequent pressure point emerges at 95 before we could see a gradual turn in the pair near February. Were not yet abandoning our 5-year approach on the cyclical lows in USDJPY and so it is too early to call the bottom of USDJPY.

Sterling to Regain Whipping Boy Status in 2010

Just as liquidity withdrawal may become the buzzword of 2010, the UK economy and its currency could fall victim to an excessive reduction in stimulus. The Bank of England has already signalled its intentions to not add any more quantitative easing, the UK Treasury plans spending cuts, the VAT hike is levied in January, the scrappage incentives for used cars expires in February and the May General Elections promise to be a close race.

None of these developments are set to favour GBP or the UK economy which has yet to recover from recession. Sterling risks regaining its status as the whipping boy of FX in 2010 as these vital dosages of oxygen are removed from a still tepid economy. The 200-day MA of $1.60 is the next target for the bears over the short term, while $1.55 is seen as the next medium term average for GBPUSD after the $1.70 figure continues to hold above the monthly closes since October 2008.