Thursday, August 23, 2012
Mitt Romney Speaks About Energy Proposals
Republican presidential candidate Mitt Romney speaks at a campaign event in Hobbs, New Mexico, about the U.S. economy and his proposals for achieving energy independence. Romney would seek to give states control over energy production on federal lands within their borders and allow drilling off the East Coast.
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Crude Oil Prices Peaked Early in 2012
Crude oil prices rose during the first quarter of 2012 as concerns about possible international supply disruptions pushed up petroleum prices. Prices then fell during the second quarter before turning sharply upward at the start of the third quarter.
Both Brent and U.S. West Texas Intermediate (WTI) crude oil started 2012 above $100 per barrel and reached a peak in early March of just over $125 per barrel for Brent and almost $110 per barrel for WTI as positive economic news that could lead to stronger oil demand and worries about supply disruptions linked to Iran's nuclear program contributed to higher prices.
Crude oil prices fell during the second quarter due, in part, to concerns about lower oil demand with a slowdown of the global economy. By the end of June, oil prices were down almost 30% from their peak to just under $78 per barrel for WTI and $91 per barrel for Brent.
Some of the major factors that influenced crude oil prices during the first half of 2012 were:
* Changes in global economic growth expectations. Strong job growth data in the U.S., lower interest rates for several European countries and increased manufacturing data in China all contributed to increased expectations for economic growth and higher crude oil prices during the first quarter of this year. A reversal of these factors in the second quarter helped push crude oil prices to their 2012 lows.
* Oil supply disruptions. Production disruptions such as those in Syria, Sudan, and Yemen took about 1 million barrels of oil per day off the world market, raising oil prices.
* Iran sanctions. Ongoing U.S. and European sanctions on imports of Iranian oil intended to pressure Iran to give up its nuclear program (1) played a part in reducing Iran's oil exports, and (2) raised fears that Iran would retaliate by disrupting oil shipments through the Strait of Hormuz. Both caused oil prices to rise.
* Rising oil production. U.S. oil production topped 6 million barrels per day in early 2012, the highest level since 1998, and contributed to building U.S. crude oil inventories that put downward pressure on oil prices.
The rise and fall of crude oil prices were reflected at the pump as gasoline and diesel prices followed the movements of oil costs, which accounted for almost two thirds of the price for motor fuels. For every $1 per barrel change in oil prices, consumers are expected eventually to see a 2.4 cent per gallon change in retail gasoline and diesel prices, if everything else remains the same.
Gasoline prices increased for the first 14 weeks of 2012 (except for one week) to a peak of $3.94 per gallon in early April and then fell for 13 weeks in a row to $3.36 per gallon at the beginning of July, the lowest pump price so far in 2012 since $3.30 per gallon during the first week of January. (See chart below)
Diesel fuel prices followed a similar path, increasing for 15 weeks (except for three weeks) to a peak of $4.15 per gallon, followed by 12 straight weeks of falling prices to a low of $3.65 per gallon. The higher price for diesel versus gasoline reflected stronger domestic diesel demand compared to gasoline consumption and record U.S. diesel exports to help satisfy rising international demand for diesel.
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Both Brent and U.S. West Texas Intermediate (WTI) crude oil started 2012 above $100 per barrel and reached a peak in early March of just over $125 per barrel for Brent and almost $110 per barrel for WTI as positive economic news that could lead to stronger oil demand and worries about supply disruptions linked to Iran's nuclear program contributed to higher prices.
Crude oil prices fell during the second quarter due, in part, to concerns about lower oil demand with a slowdown of the global economy. By the end of June, oil prices were down almost 30% from their peak to just under $78 per barrel for WTI and $91 per barrel for Brent.
Some of the major factors that influenced crude oil prices during the first half of 2012 were:
* Changes in global economic growth expectations. Strong job growth data in the U.S., lower interest rates for several European countries and increased manufacturing data in China all contributed to increased expectations for economic growth and higher crude oil prices during the first quarter of this year. A reversal of these factors in the second quarter helped push crude oil prices to their 2012 lows.
* Oil supply disruptions. Production disruptions such as those in Syria, Sudan, and Yemen took about 1 million barrels of oil per day off the world market, raising oil prices.
* Iran sanctions. Ongoing U.S. and European sanctions on imports of Iranian oil intended to pressure Iran to give up its nuclear program (1) played a part in reducing Iran's oil exports, and (2) raised fears that Iran would retaliate by disrupting oil shipments through the Strait of Hormuz. Both caused oil prices to rise.
* Rising oil production. U.S. oil production topped 6 million barrels per day in early 2012, the highest level since 1998, and contributed to building U.S. crude oil inventories that put downward pressure on oil prices.
The rise and fall of crude oil prices were reflected at the pump as gasoline and diesel prices followed the movements of oil costs, which accounted for almost two thirds of the price for motor fuels. For every $1 per barrel change in oil prices, consumers are expected eventually to see a 2.4 cent per gallon change in retail gasoline and diesel prices, if everything else remains the same.
Gasoline prices increased for the first 14 weeks of 2012 (except for one week) to a peak of $3.94 per gallon in early April and then fell for 13 weeks in a row to $3.36 per gallon at the beginning of July, the lowest pump price so far in 2012 since $3.30 per gallon during the first week of January. (See chart below)
Diesel fuel prices followed a similar path, increasing for 15 weeks (except for three weeks) to a peak of $4.15 per gallon, followed by 12 straight weeks of falling prices to a low of $3.65 per gallon. The higher price for diesel versus gasoline reflected stronger domestic diesel demand compared to gasoline consumption and record U.S. diesel exports to help satisfy rising international demand for diesel.
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Wednesday, August 22, 2012
Addison Armstrong Tells us what he thinks it will take to push crude oil higher
Crude oil is continuing its rise today, with Addison Armstrong, Tradition Energy; and the Fast Money traders discuss a few ways to get short in Australia, and sinking iron ore prices.
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Wednesday Morning Market Analysis Video
Yesterday was a great session with stocks putting in a top and distribution selling stepped in right on queue. A lot of investments looked as though they were about to reverse. Bonds were set to rally, stocks were set to fall, dollar index was ready to bottom and volatility was primed for a pop. Members of my trading alert service The Gold & Oil Guy were asking me why I only went long VXX and not all of them?
My answer to that is because they are all the same trade almost. If any of those fail to reverse it means the others will likely not reverse either. Thus we would have 4 losing trades at the same time. Instead I measure the potential profits and risk for each investment then pick the one which I feel has the best potential which happened to be the VXX trade I took yesterday. We pocketed 4.25% – 5% in one day and still hold a runner for much larger gains. This sure beats the performance of all the other investments we were looking at yesterday.
This morning’s video analysis covers a lot of interesting and educational points on the market so be sure to watch it right now and stay ahead of the market.
Pre-Market Analysis Points:
- Dollar index looks to be bottoming as we expected on Monday.
- Crude oil is going to be choppy up at resistance for some time. No trade for weeks there likely.
- Natural gas is trying to break out of a mini basing pattern and I may get long UNG today.
- Gold, silver and gold miners are starting to have signs of a trend reversal to the upside but still not there yet.
- Bonds look to have bottomed yesterday bouncing 1%. I feel there is another 1% bounce left before it runs into resistance.
- SP500 is showing signs of distribution selling and has broken its first support trend line. With any luck we see another 4-5% drop is price.
- VIX moved higher with the SP500 yesterday as it broke to new highs. This is the opposite of what it should have done and one of the reasons why I jumped into VXX yesterday. Rising stocks prices and rising fear means the big money players are buying insurance for a drop near term because they are not confident about the new highs.
My answer to that is because they are all the same trade almost. If any of those fail to reverse it means the others will likely not reverse either. Thus we would have 4 losing trades at the same time. Instead I measure the potential profits and risk for each investment then pick the one which I feel has the best potential which happened to be the VXX trade I took yesterday. We pocketed 4.25% – 5% in one day and still hold a runner for much larger gains. This sure beats the performance of all the other investments we were looking at yesterday.
This morning’s video analysis covers a lot of interesting and educational points on the market so be sure to watch it right now and stay ahead of the market.
Pre-Market Analysis Points:
- Dollar index looks to be bottoming as we expected on Monday.
- Crude oil is going to be choppy up at resistance for some time. No trade for weeks there likely.
- Natural gas is trying to break out of a mini basing pattern and I may get long UNG today.
- Gold, silver and gold miners are starting to have signs of a trend reversal to the upside but still not there yet.
- Bonds look to have bottomed yesterday bouncing 1%. I feel there is another 1% bounce left before it runs into resistance.
- SP500 is showing signs of distribution selling and has broken its first support trend line. With any luck we see another 4-5% drop is price.
- VIX moved higher with the SP500 yesterday as it broke to new highs. This is the opposite of what it should have done and one of the reasons why I jumped into VXX yesterday. Rising stocks prices and rising fear means the big money players are buying insurance for a drop near term because they are not confident about the new highs.
Monday, August 20, 2012
Gold Price and Indian Demand Shifting Trends
From Chris Vermeulen at The Gold & Oil Guy.com.......
One of the top stories in the financial markets in 2012 has to be the stagnation in the price of gold at around $1600 an ounce, which is down approximately 17% from its peak at $1920.30. Those bullish on the yellow metal have been disappointed in gold’s performance while those bearish on the shiny metal have reveled in its stagnation, saying that gold’s status as a safe haven is over.
What is behind gold’s sluggish performance in 2012? There are several reasons, but one of the key fundamental reasons has been the lack of demand from traditionally the largest buyer of gold on the planet – India (although China will surpass it this year). India bought only 181.3 tons in the second quarter of 2012, a 2-year low, according to the London-based World Gold Council.
There are several factors at play as to why Indian demand for gold has fallen. One reason is the sharp drop in the value of its currency, the rupee, which is down by 25% versus the U.S. dollar this year. This decline has kept gold prices high in relative terms while the actual dollar value of gold was falling. Perhaps even more important has been the ‘war’ declared on gold by its central bank which has blamed all of the country’s economic ills on Indian citizens’ traditional buying of gold. In an attempt to slow down gold and silver imports, the Indian government has imposed new taxes on the purchase of these precious metals.
But even though demand for the precious metal is way down in India, the situation still offers hope for gold bulls. Why? Because we’ve been here before – in 2009 to be exact. In early 2009, the Indian economy and rupee tanked. Gold demand almost completely dried up. According to precious metals consultancy GFMS, Indian demand for gold in the first quarter of 2009 collapsed by 77%. For the full year GFMS said Indian consumption dropped by 19%.
Now with the Indian economy slowing to its weakest growth rate in nearly a decade and the rupee falling, we are seeing a replay of 2009. The monsoon season has been poor, hitting farmers – among the biggest buyers of gold – hard. Gold prices have hit a record high in rupee terms, and India is expected to purchase, as forecast by the World Gold Council, only 750 tons of gold, down 25% from 2011 levels. Meanwhile, the WGC forecasts that China will buy 850 tons of gold this year.
Investors should pay heed to the clues that recent history is giving us. The drop in Indian demand is simply a cyclical phenomenon due to the lousy state of the Indian economy. It will recover eventually. And when it does, look out for the fireworks from renewed Indian demand for gold added to the Chinese demand. In 2010, as pent-up demand for gold was unleashed, Indian gold consumption soared 74% to a record high of 1,006 tons according to GFMS.
Gold bulls surely hope we see something similar in 2013 and that is exactly what I talked about last week based around gold miner stocks and also what Dave Banister’s recent gold forecast was about at TheMarketTrendForecast.com sees in 2013.
Gold Chart Showing 2009 Collapse and Outcome and Current Gold Price Analysis:
Gold Trading & Investing Conclusion:
In short, gold and gold stocks have a lot of work to do before they truly breakout into the next major leg higher. I feel we are nearing that point and they may have bottomed already. Starting a small long position to scale in I think is a safe play. But I would only add more once the trend actually turns up and shows strength in terms of price and volume action.
One of the top stories in the financial markets in 2012 has to be the stagnation in the price of gold at around $1600 an ounce, which is down approximately 17% from its peak at $1920.30. Those bullish on the yellow metal have been disappointed in gold’s performance while those bearish on the shiny metal have reveled in its stagnation, saying that gold’s status as a safe haven is over.
What is behind gold’s sluggish performance in 2012? There are several reasons, but one of the key fundamental reasons has been the lack of demand from traditionally the largest buyer of gold on the planet – India (although China will surpass it this year). India bought only 181.3 tons in the second quarter of 2012, a 2-year low, according to the London-based World Gold Council.
There are several factors at play as to why Indian demand for gold has fallen. One reason is the sharp drop in the value of its currency, the rupee, which is down by 25% versus the U.S. dollar this year. This decline has kept gold prices high in relative terms while the actual dollar value of gold was falling. Perhaps even more important has been the ‘war’ declared on gold by its central bank which has blamed all of the country’s economic ills on Indian citizens’ traditional buying of gold. In an attempt to slow down gold and silver imports, the Indian government has imposed new taxes on the purchase of these precious metals.
But even though demand for the precious metal is way down in India, the situation still offers hope for gold bulls. Why? Because we’ve been here before – in 2009 to be exact. In early 2009, the Indian economy and rupee tanked. Gold demand almost completely dried up. According to precious metals consultancy GFMS, Indian demand for gold in the first quarter of 2009 collapsed by 77%. For the full year GFMS said Indian consumption dropped by 19%.
Now with the Indian economy slowing to its weakest growth rate in nearly a decade and the rupee falling, we are seeing a replay of 2009. The monsoon season has been poor, hitting farmers – among the biggest buyers of gold – hard. Gold prices have hit a record high in rupee terms, and India is expected to purchase, as forecast by the World Gold Council, only 750 tons of gold, down 25% from 2011 levels. Meanwhile, the WGC forecasts that China will buy 850 tons of gold this year.
Investors should pay heed to the clues that recent history is giving us. The drop in Indian demand is simply a cyclical phenomenon due to the lousy state of the Indian economy. It will recover eventually. And when it does, look out for the fireworks from renewed Indian demand for gold added to the Chinese demand. In 2010, as pent-up demand for gold was unleashed, Indian gold consumption soared 74% to a record high of 1,006 tons according to GFMS.
Gold bulls surely hope we see something similar in 2013 and that is exactly what I talked about last week based around gold miner stocks and also what Dave Banister’s recent gold forecast was about at TheMarketTrendForecast.com sees in 2013.
Gold Chart Showing 2009 Collapse and Outcome and Current Gold Price Analysis:
Gold Forecast - India Gold demand
Gold Trading & Investing Conclusion:
In short, gold and gold stocks have a lot of work to do before they truly breakout into the next major leg higher. I feel we are nearing that point and they may have bottomed already. Starting a small long position to scale in I think is a safe play. But I would only add more once the trend actually turns up and shows strength in terms of price and volume action.
If you would like to get my weekly analysis on precious metals and the board market be sure to join my free newsletter at The Gold & Oil Guy.com
Natural Gas, Renewables Dominate Electric Capacity Additions in First Half of 2012
During the first half of 2012, 165 new electric power generators were added in 33 states, for a total of 8,098 megawatts (MW) of new capacity. Of the ten states with the highest levels of capacity additions, most of the new capacity uses natural gas or renewable energy sources. Capacity additions in these ten states total 6,500 MW, or 80% of the new capacity added nationally in the first six months of 2012.
Most of the new generators built over the past 15 years are powered by natural gas or wind. In 2012, the addition of natural gas and renewable generators comes at a time when natural gas and renewable generation are contributing increasing amounts to total generation across much of the United States.
In particular, efficient combined-cycle natural gas generators are competitive with coal generators over a large swath of the country. And, in the first half of 2012, these combined-cycle generators were added in states that traditionally burn mostly coal (with the exception of Idaho, which has significant hydroelectric resources).
Source: U.S. Energy Information Administration, Form EIA-860M "Monthly Update to the Annual Electric Generator Report."
Note: Data are preliminary and include all generators at plants >1MW in capacity, from the electric power, commercial, and industrial sectors. "Other renewables" includes hydroelectric, geothermal, landfill gas, and biomass generators.
Only one coal fired generator was brought online in the first half of 2012, an 800-MW unit at the Prairie State Energy Campus in Illinois. In its 2011 annual survey of power plant operators, the U.S. Energy Information Administration (EIA) received no new reports of planned coal fired generators. Of the planned coal generators in EIA databases, 14 are reported in the construction phrase, with an additional 5 reporting a planned status but not yet under construction.
However, only one of the 14 advanced from a pre-construction to an under-construction status between the 2010 and 2011 surveys.....Read the entire EIA article.
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Most of the new generators built over the past 15 years are powered by natural gas or wind. In 2012, the addition of natural gas and renewable generators comes at a time when natural gas and renewable generation are contributing increasing amounts to total generation across much of the United States.
In particular, efficient combined-cycle natural gas generators are competitive with coal generators over a large swath of the country. And, in the first half of 2012, these combined-cycle generators were added in states that traditionally burn mostly coal (with the exception of Idaho, which has significant hydroelectric resources).
Source: U.S. Energy Information Administration, Form EIA-860M "Monthly Update to the Annual Electric Generator Report."
Note: Data are preliminary and include all generators at plants >1MW in capacity, from the electric power, commercial, and industrial sectors. "Other renewables" includes hydroelectric, geothermal, landfill gas, and biomass generators.
Only one coal fired generator was brought online in the first half of 2012, an 800-MW unit at the Prairie State Energy Campus in Illinois. In its 2011 annual survey of power plant operators, the U.S. Energy Information Administration (EIA) received no new reports of planned coal fired generators. Of the planned coal generators in EIA databases, 14 are reported in the construction phrase, with an additional 5 reporting a planned status but not yet under construction.
However, only one of the 14 advanced from a pre-construction to an under-construction status between the 2010 and 2011 surveys.....Read the entire EIA article.
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Looks like the copper market is signaling a top in the SP 500
The past 5 – 6 weeks have seen equity prices move considerably
higher amid growing concerns regarding the European debt crisis, the
instability of the Middle East, and ultimately the potential for a major
economic slowdown in the United States.
U.S. equity indexes have continued to climb the proverbial “Wall of
Worry” since the first week of June and have put on an incredible run.
This past Friday saw the S&P 500 Index (SPX) post the highest weekly
close of 2012. The perma bears have been calling for a top and continue
to run scared as light volume and volatility have given the bulls an
edge during August.
The next key overhead resistance level for the S&P 500 Index to hurdle is the 1,440 resistance zone lingering slightly overhead. I try to refrain from calling tops or bottoms as I feel its a fool’s game that ultimately humbles most market prognosticators. If calling tops and bottoms was easy, investors and traders alike would be able to produce monster gains all the time with uncanny precision.
Instead of trying to predict where the S&P 500 Index will find resistance or create an intermediate to longer term top, I will simply posit some technical and macro-economic data that indicates we are likely closing in on a major top.
As stated above, the recent rally we have seen has taken place on relatively light volume and plunging volatility as measured by the Volatility Index (VIX).
Volatility Index (VIX) Weekly Chart
As can be seen above, Friday’s weekly close for the VIX was the lowest in 2012 and ultimately one of the lowest closing price levels in several years. While the VIX is trading at a major intermediate low, there remains a lower support level going back to late 2006 and the early part of 2007 around the 10 price level.
The perma bulls would argue that we could see those 2006 – 2007 lows tested, but based on September monthly VIX options the option market seemingly is arguing that we are approaching an intermediate low in the Volatility Index. The chart below illustrates the September VIX option chain based on Friday’s closing prices.
Volatility Index (VIX) September Monthly Option Chain
Price action is never wrong, but many times a great deal of information can be acquired by simply reviewing option prices. As can be seen above, the VIX closed on Friday at 13.45, a new 2012 low. However, when we consider the prices in the VIX September option chain shown above I would point out that the VIX September 13 Puts are 0 bid.
What this essentially means is that the VIX options market is saying that the Volatility Index is unlikely to move below 13 in September. For readers unfamiliar with options, selling a naked put or using a put credit spread are two trading structures that are bullish regarding the underlying asset which in this case is the VIX.
The VIX September 13 puts are offered at 0.05 on the ask, but are at 0 on the bid.
This means that the VIX market makers are not expecting to see the VIX move below 13. Clearly this is not a guarantee as there is never a sure thing in financial markets. However, this pricing situation for the September 13 VIX Puts is favorable for the equity bears in September.
In layman’s terms, the VIX needs to move higher in the next 3 weeks based on the fact that the September VIX 13 Puts are 0 bid. This is one of several clues that we could be nearing a major top in the S&P 500 Index in the very near future.
When we look at a weekly chart of the S&P 500 Index (SPX) it is obvious that we have a major longer term breakout which occurred this past week. However, there remains additional resistance overhead in the 1,440 – 1,450 price range.
S&P 500 Index (SPX) Weekly Chart
While 1,440 might be a major area where a significant top could form,
a rally above this level cannot be ruled out entirely. However, the
chart above gives traders and investors a context for where possible
tops could form.
A reversal could play out almost immediately at the current levels or we could move considerably higher before finding major resistance that holds. For now, we do not have enough evidence based on the S&P 500 Index price chart to proclaim that a top has formed or will form in the near future.
Another underlying asset that I monitor closely is copper futures. Generally speaking, if copper futures are rallying economic conditions tend to be strong. The opposite can be said when copper futures are under selling pressure. Recently copper futures prices have been trading in a relatively tight trading range, but the longer term weekly chart shown below demonstrates that should prices start to sell off, a major sell off could transpire.
Copper Futures Weekly Chart
As shown above, there is a monstrously large head and shoulders
pattern (bearish) that goes back to early 2010 that has formed on the
weekly chart. Should the neckline of this pattern get taken out on a
weekly close the selling pressure that could transpire could be
devastating regarding the price of copper.
However, a major selloff in copper would also indicate that economic conditions were weakening globally. If copper triggers this bearish pattern, it would likely not be long before other risk assets followed suit.
In addition to the possibility that major selling pressure could await copper should that pattern trigger, another macroeconomic data point would argue that economic conditions are already starting to contract.
The chart shown below, courtesy of Bloomberg, illustrates the amount of waste hauled by railroad cars and the implicit correlation to U.S. gross domestic product (GDP).
Waste Railcar Loads Versus GDP Chart
Recently Zerohedge.com posited an article that featured this chart and a link to that article is found HERE. The article and the accompanying chart demonstrate that as more products are produced, additional waste can be expected. As shown above, the amount of waste being produced and hauled by railcar has fallen off a cliff and should longer-term correlations remain intact a contraction in U.S. GDP is likely not far away.
There are a multitude of other topping triggers that I follow that are all screaming that a major intermediate and possibly even a longer-term top is nearby. However, at the moment the price action in the S&P 500 Index (SPX) is arguing otherwise.
Picking tops and bottoms in advance is extremely difficult and generally foolhardy, however when multiple triggers are going off regarding a possible type I pay close attention to price action. While I will not go as far as to say where specifically a top in the S&P 500 Index will form, I believe that a top is forthcoming and could even occur in the next 2 – 3 weeks.
Price is never wrong, and eventually I suspect that price will tell us what we wish to know. For now, I am going into the next few weeks with caution regarding the upside in risk assets. However, it is important to point out that I am not looking to get short risk assets either.
My research indicates that a major inflection point is coming and it could coincide with the Federal Reserve’s Jackson Hole summit. It could coincide with an event that we are unaware of as well. At the moment risk in either direction seems high and caution regardless of directional bias should be exercised. The next few weeks should tell the ultimate tale.
Happy Trading!
Test drive our video analysis and trade idea service for only $1 at the Trader Video Playbook.com
Chris Vermeulen & J.W. Jones
The next key overhead resistance level for the S&P 500 Index to hurdle is the 1,440 resistance zone lingering slightly overhead. I try to refrain from calling tops or bottoms as I feel its a fool’s game that ultimately humbles most market prognosticators. If calling tops and bottoms was easy, investors and traders alike would be able to produce monster gains all the time with uncanny precision.
Instead of trying to predict where the S&P 500 Index will find resistance or create an intermediate to longer term top, I will simply posit some technical and macro-economic data that indicates we are likely closing in on a major top.
As stated above, the recent rally we have seen has taken place on relatively light volume and plunging volatility as measured by the Volatility Index (VIX).
Volatility Index (VIX) Weekly Chart
Volatility Index (VIX) Weekly Chart
As can be seen above, Friday’s weekly close for the VIX was the lowest in 2012 and ultimately one of the lowest closing price levels in several years. While the VIX is trading at a major intermediate low, there remains a lower support level going back to late 2006 and the early part of 2007 around the 10 price level.
The perma bulls would argue that we could see those 2006 – 2007 lows tested, but based on September monthly VIX options the option market seemingly is arguing that we are approaching an intermediate low in the Volatility Index. The chart below illustrates the September VIX option chain based on Friday’s closing prices.
Volatility Index (VIX) September Monthly Option Chain
Volatility Index (VIX) September Monthly Option Chain
Price action is never wrong, but many times a great deal of information can be acquired by simply reviewing option prices. As can be seen above, the VIX closed on Friday at 13.45, a new 2012 low. However, when we consider the prices in the VIX September option chain shown above I would point out that the VIX September 13 Puts are 0 bid.
What this essentially means is that the VIX options market is saying that the Volatility Index is unlikely to move below 13 in September. For readers unfamiliar with options, selling a naked put or using a put credit spread are two trading structures that are bullish regarding the underlying asset which in this case is the VIX.
The VIX September 13 puts are offered at 0.05 on the ask, but are at 0 on the bid.
This means that the VIX market makers are not expecting to see the VIX move below 13. Clearly this is not a guarantee as there is never a sure thing in financial markets. However, this pricing situation for the September 13 VIX Puts is favorable for the equity bears in September.
In layman’s terms, the VIX needs to move higher in the next 3 weeks based on the fact that the September VIX 13 Puts are 0 bid. This is one of several clues that we could be nearing a major top in the S&P 500 Index in the very near future.
When we look at a weekly chart of the S&P 500 Index (SPX) it is obvious that we have a major longer term breakout which occurred this past week. However, there remains additional resistance overhead in the 1,440 – 1,450 price range.
S&P 500 Index (SPX) Weekly Chart
A reversal could play out almost immediately at the current levels or we could move considerably higher before finding major resistance that holds. For now, we do not have enough evidence based on the S&P 500 Index price chart to proclaim that a top has formed or will form in the near future.
Another underlying asset that I monitor closely is copper futures. Generally speaking, if copper futures are rallying economic conditions tend to be strong. The opposite can be said when copper futures are under selling pressure. Recently copper futures prices have been trading in a relatively tight trading range, but the longer term weekly chart shown below demonstrates that should prices start to sell off, a major sell off could transpire.
Copper Futures Weekly Chart
However, a major selloff in copper would also indicate that economic conditions were weakening globally. If copper triggers this bearish pattern, it would likely not be long before other risk assets followed suit.
In addition to the possibility that major selling pressure could await copper should that pattern trigger, another macroeconomic data point would argue that economic conditions are already starting to contract.
The chart shown below, courtesy of Bloomberg, illustrates the amount of waste hauled by railroad cars and the implicit correlation to U.S. gross domestic product (GDP).
Waste Railcar Loads Versus GDP Chart
Waste Railcar Loads Versus GDP Chart
Recently Zerohedge.com posited an article that featured this chart and a link to that article is found HERE. The article and the accompanying chart demonstrate that as more products are produced, additional waste can be expected. As shown above, the amount of waste being produced and hauled by railcar has fallen off a cliff and should longer-term correlations remain intact a contraction in U.S. GDP is likely not far away.
There are a multitude of other topping triggers that I follow that are all screaming that a major intermediate and possibly even a longer-term top is nearby. However, at the moment the price action in the S&P 500 Index (SPX) is arguing otherwise.
Picking tops and bottoms in advance is extremely difficult and generally foolhardy, however when multiple triggers are going off regarding a possible type I pay close attention to price action. While I will not go as far as to say where specifically a top in the S&P 500 Index will form, I believe that a top is forthcoming and could even occur in the next 2 – 3 weeks.
Price is never wrong, and eventually I suspect that price will tell us what we wish to know. For now, I am going into the next few weeks with caution regarding the upside in risk assets. However, it is important to point out that I am not looking to get short risk assets either.
My research indicates that a major inflection point is coming and it could coincide with the Federal Reserve’s Jackson Hole summit. It could coincide with an event that we are unaware of as well. At the moment risk in either direction seems high and caution regardless of directional bias should be exercised. The next few weeks should tell the ultimate tale.
Happy Trading!
Test drive our video analysis and trade idea service for only $1 at the Trader Video Playbook.com
Chris Vermeulen & J.W. JonesSunday, August 19, 2012
Predicting the Next Bull Cycle
The last twelve years has seen the S&P 500 go from a high of 1552 in March of 2000 to a current level of 1404, as of this writing. Yes, if you factor in dividends, the stock market has made money over the past twelve years, but to see negative nominal growth is still frustrating. To have this happen for such a long period of time makes us all realize that we are in a secular bear market, which is a long term downward or horizontal movement in the market. If you put inflation into the equation, your money in 2000 was worth considerably more than it is today, which is a double whammy after getting no nominal growth in that time period.
This is one of the many things we discuss at MGO with our Chief Investment Officer, Michael Moskal. It is a constant topic of conversation due to the fact that we manage about $500MM in total assets and we always have clients anywhere from factory workers to CEOs wondering how their 401(k) and managed accounts are doing.
Of course, many financial planners and wealth managers will argue that we have made it through the crap of 2008 and that we are on our way to new highs. Well, apart from the fact that if they didn't say that, they may lose clients, this is somewhat erroneous based on history. While that MAY be true, history has proven to show otherwise. Let's first discuss the non-data related information.
The average secular bear or bull market lasts 17 years. Since 1877, here are the secular highs and lows (adjusted for inflation) to show the kind of returns we have seen.....Here's the entire article with Charts
Saturday, August 18, 2012
ONG: Crude Oil Weekly Technical Outlook for Saturday August 18th
Crude oil's rally continued last week and reached as high as 96.28 so far. Further rally is expected to continue to 61.8% retracement of 110.55 to 77.28 at 97.84. Though, note that rise from 77.28 could be the fourth leg inside the triangle pattern from 114.83. Hence, we'll be cautious on topping between 100 and 110. On the downside, below 92.68 minor support is needed to indicate short term topping. Otherwise, we'll stay bullish even in case of retreat.
In the bigger picture, price actions from 114.83 are viewed either a three wave consolidation pattern that's completed at 77.28, or a five wave triangle pattern that's still unfolding. In case, break of 110.55 resistance will strongly suggest that whole rebound from 33.29 has resumed for above 114.83. While another fall could be seen before an eventual upside breakout, downside should be contained above 77.28 support.
In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.
Friday, August 17, 2012
Bloomberg: Crude Oil Rises as U.S. Consumer Confidence Improves
“The economic data are getting better,” said Jacob Correll, a Louisville, Kentucky-based analyst at Summit Energy Inc., which manages more than $20 billion in companies’ annual energy spending. “You have a lot of tension ratcheting up in the Middle East and oil’s been having a rally”....Read the entire Bloomberg article.
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