K's Analytical Musings

A Quits vs Hires Beveridge Curve?

2010-11-07T09:17:00.010-07:00

Stephen Gordon, on WCI, had a nice post exploring the JOLTS data coming out of the US (Another view of the sluggish US labour market). I wanted to follow up on Stephen's idea that in 2009 separations -- both quits and layoffs -- fell to match hires. I like this idea, particularly as it seems that quits are hires are strongly correlated. My base model is that quits is dependent upon hires, i.e., if there is lots of hiring going on in the job market people are more likely to quit.

In particular I wanted to look at the equivalent Beveridge curve for quits and hires. What I'm seeing is that not only did quits fall to match the drop in hires, but that the number of quits fell further than one would expect assuming a linear relationship between quits and hires.

In the chart above I've plotted Quits versus Hires over the Dec 2000 - August 2010 period, and I've split the data into two groups. The pre-crash period from Dec 2000 - Oct 1, 2008 is plotted in black and the Nov 1, 2008 - Aug 1, 2010 data is plotted in purple. I calculated the regression over pre-crash period, and plotted this regression in blue.

Assuming the linear regression is an accurate description of the relationship between hires and quits, the number of quits, post Nov 1, 2008 have fallen below what would be expected by the number of hires. Echoing what Stephen said, I'm not sure if this is good news, but it probably has helped keep the unemployment rate from going higher.

Yet more on CAD/USD and WTI

2010-04-16T23:10:00.006-06:00

This post continues on the discussion of the degree to which CAD/USD is influenced by WTI, and is primarily meant to add some colour to the discussion of a post by Mike Moffat over at WCI.

In earlier posts (here and here) I had argued that the price of CAD/USD was not directly influenced by the price of oil, but rather by US dollar strength (or weakness). My claim was supported by the fact that CAD/EUR, which should gauge Canadian dollar strength independent of the US dollar, was not particularly correlated to the price of oil.

Having thought about this a bit more, I want to expand on this discussion. Specifically, while it is true that CAD/USD is primarily influenced by the strength of the US dollar (as is the price of oil), one can discern periods where the price of oil is higher than one would expect solely from US dollar strength. During these periods, the Canadian dollar seems to outperform the Euro (that is CAD/EUR rises). This suggests that when the price of oil is higher than expected based on USD, it correlates with Canadian dollar strength. In other words, CAD/USD and the price of oil are correlated independent of the US dollar.

Below is a chart with WTI in the top panel on a log scale (OHLC bars). Superimposed in the panel is 1/US Dollar Index on a linear scale (which plots US dollar weakness). EUR/USD and CAD/USD are plotted in the second panel in blue and red respectively. CAD/EUR appears in the third panel.

My first comment is that log(WTI) seems to correlate much better with 1/USD than WTI, at least over the 2003-2010 period.

Second, I've highlighted three periods in tan where US dollar weakness (i.e., 1/USD) outperforms log(WTI) strength. During these periods, EUR/USD outperforms CAD/USD and CAD/EUR falls. I've also highlighted three periods in yellow where log(WTI) outperforms US dollar weakness. During these periods, CAD/USD outperforms EUR/USD and CAD/EUR rises.

Thus when WTI is stronger than what one would predict from USD (that is when log(WTI) outpeforms 1/USD), the Canadian dollar outperforms the Euro. Conversely when WTI is weaker than what one would predict from USD (1/USD outperforms log(WTI)), the Canadian dollar underperforms the Euro.

From this data I can't help but conclude that the price of oil has an independent correlation to the Canadian dollar (indpendent of the US dollar that is). But evidence of the correlation only appears when the price of WTI diverges from what one would predict solely on the basis of the US dollar.

I owe Stephen Gordon an apology for nitpicking to such a degree about his earlier post.

More on CAD/USD & WTI

2010-04-02T14:18:00.015-06:00

Mike Moffat on WCI posted a "toy" model relating CAD/USD to the price of oil and interest rate differential between the U.S. and Canada. I've reproduced his model below:

Using the daily data from the years 2001-2006 a linear regression was run to calculate values for the toy:
MERT value = 48.62 + (0.6211*OIL) + (1.8306*INTGAP)
where:
MERT = The predicted value of the Canadian dollar (CAD/USD)

OIL = WTI Cushing Spot price in dollars

INTGAP = Target for the Overnight Rate (Canada) - Target for the Federal Funds Rate (U.S.). A 1.25% target for the overnight rate enters the equation as 1.25.

Really quite a lovely "toy" which does a pretty good job in estimating the CAD/USD exchange rate (see the above link for some graphs of its predictive capabilities). I especially like the use of WTI as a predictive term. Now WTI is strongly correlated with the inverse of the US dollar. I believe the power of the "toy" in predicting CAD/USD stems from this strong correlation.

So I was wondering about my earlier use of CAD/EUR to gauge Canadian dollar strength independent of the US dollar and thought to examine that technique in light of this new "toy". Specifically, how does CAD/EUR compare to both WTI and the inverse of the US dollar (or the US Dollar Index).

WTI appears in the top panel as OHLC bars along with the inverse of the US Dollar Index as a blue line. CAD/EUR appears in the second panel as a green line along with CAD/USD as a red line. My apologies for the busy chart.

Note: WTI is plotted on a log scale, while the inverse of USD is on a linear scale!

via Stockcharts.com
It's immediately apparent that log WTI and the inverse of the US Dollar Index are strongly correlated (I looked at straight WTI versus inverse US Dollar Index, and the log appears to be a much better fit).

I've highlighted several periods where the two signal diverge. The yellow periods indicates instances where the US dollar weakens faster than WTI strengthens (that is inverse US dollar index rises above WTI). In these periods, CAD/EUR drops as the Euro outperforms the Canadian dollar. The tan periods are instances where Inverse US Dollar Index underperforms WTI (i.e., the US dollar strengthens while WTI remains strong). In these periods, CAD/EUR rises.

What I find very interesting is that when Inverse US Dollar Index diverges from WTI, CAD/EUR follows the US dollar (the dollar index itself, not the inverse). When the US dollar weakens faster than WTI falls, CAD/EUR falls (yellow periods), and when US dollar rises faster than WTI falls, CAD/EUR rises (tan periods).

If you examine CAD/USD (red line), whatever influence CAD/EUR has on the Canadian dollar appears to be dwarfed by whatever the US dollar is doing. Post 2003, CAD/USD and CAD/EUR appear correlated, but previous to this date, changes in CAD/EUR appear to have only a small correlation to CAD/USD.

Finally, it's important to note that this approach ignores other macroeconomic variables which could influence exchange rates. In particular, Mike Moffat's "toy" model includes the interest rate gap between Canada and the US.

Update: After further thought, I'm not sure that the above figure speaks one way or another on WTI's independent influence on CAD/USD. Now it is true that CAD/EUR tends to follow USD more than WTI (yellow and tan regions). But, this is probably happening because USD is moving more than WTI in each of those bands.

I think there are better approaches, but I'll post more when I get a chance.

Is the Canadian Dollar Driven by the Price of Oil?

2010-03-23T20:05:00.008-06:00

This post was prompted by a post by Stephen Gordon on the Worthwhile Canadian Initiative discussing the Bank of Canada and the exchange rate. I'm not trying to contradict the main point of that post, but rather I just want to add some more information.

The post discusses how the CAD/USD exchange rate is approaching parity, and notes the correlation between commodity prices and the CAD/USD exchange rate. I've reproduced Stephen's chart on this correlation below.

Clearly CAD/USD is correlated to commodity prices, but I would argue that this correlation is through USD weakness, not CAD strength. Now this seems a little strange; with Canada exporting so many commodities (particularly oil), one would think that an increase in the price of commodities (oil) which increases the total value of exports would lead to strengthening of the Canadian dollar. But if you look closely, the relationship between price of oil and the strength of the Canadian dollar is not consistent. And by the strength of the Canadian dollar I mean the strength independant of the US dollar.

Consider the strength of the Euro. Europe (or at least Euro-land) is a net importer of oil. So an increase in the price of oil should weaken the Euro, just as it should strengthen the Canadian dollar. So the CAD/Euro exchange rate should be correlated to the price of oil, with the Canadian dollar strengthening with respect to the Euro as the price of oil rises.

Below is a Stockcharts chart with 6 instruments as weekly bars for the last 10 years. The top panel has the Dow Jones Commodity Index (brown bars) and the second panel has WTI (crude oil) as OHLC bars with the CAD/Euro exchange rate as a green line. The remaining panels have CAD/USD, Euro/USD and the US Dollar Index.

Now compare WTI versus CAD/Euro. There's a 3 year period from 2005 to late 2007 where it appears that CAD/Euro is correlated to WTI. But from 2002-2005 WTI and CAD/Euro appear to be inversely correlated !?! And from late 2007 till late 2009 is appears that after a period of inverse correlation the two signals lose correlation. On the whole, it doesn't look like CAD/Euro is strongly correlated to WTI over the last 8 years. Similarly, CAD/Euro doesn't look strongly correlated to the DJ Commodity Index either (top panel, brown bars).

Now maybe looking at CAD/Euro isn't the right way to assess the strength of the Canadian dollar independent of the US dollar, but it is a good start. Given that Euro-land is a net importer of oil (and commodities?) while Canada is a net exporter, the lack of correlation between CAD/Euro and WTI (and commodity prices) would suggest that the Canadian dollar is not strongly correlated to the price of oil (or commodities).

However, CAD/USD is correlated to the price of commodities. I would suggest that this correlation is driven by USD -- that is since commodities are priced in US dollars, then a drop in USD will lead to a rise in the price of commodities proportional to the rise in CAD/USD.

Moreover, since the price of commodities is not directly influencing CAD/USD (rather USD is influencing the price of commodities), I'm not sure that the price of commodities adds much extra information when examining CAD/USD. Rather, it might be more informative to look directly at USD, such as the US dollar index -- maybe by comparing USD/CAD to the US dollar index, periods of relative CAD strength would become apparent.

(click to expand)

Has the Canadian Dollar strengthened?

2009-12-23T11:06:00.008-07:00

The Canadian Dollar (CAD) has strengthened markedly against the US Dollar (USD) in the last decade rising from an average of CAD 0.64 per USD in 2002 to CAD 0.94 per USD in 2008, a 48% rise. What has caused the rise in CAD/USD?

One idea that seems to attract a lot of attention is that CAD/USD has been driven higher by the rise in the price of crude oil and the output from Alberta's Tar Sands (see for instance the comments in this blog: We are all Albertans - On est tous des Albertans). The idea is appealing as the dollar value of Canada's exports have clearly increased with the rise in the price of oil.

But exchange rate data doesn't generally support the idea that the rise in CAD/USD is due to the Canadian dollar strengthening, as compared to the US dollar weakening. In particular, if the rise in CAD/USD stemmed from the strengthening of the Canadian Dollar, then one should also see similar rises in the Canadian Dollar versus other currencies. Conversely, if the rise in CAD/USD has stemmed from USD falling, then one would expect to see USD fall against other currencies.

Below is a chart plotting the average monthly exchange rate for CAD/USD, CAD/EUR (Euro) and EUR/USD from January 1999*. Since 2002, both the Canadian dollar AND the Euro have strengthened considerably against the US Dollar (approximately 50% in both cases), but the Canadian Dollar versus the Euro has been flat (with some variance).

Now the Euro-area is a net importer of crude oil, and Canada (through the Albertan Tar Sands) is a net exporter. If the rise in the price of oil and output from Alberta was driving the Canadian dollar higher, then one would expect that CAD/EUR would rise? But the exchange rate has been flat (especially compared to the US crosses)

There is also a great counter-example to the idea that the price of oil has been driving the Canadian dollar higher in this data set. In the first half of 2008 the price of oil rose from $100 to nearly $150 (marked with an arrow on the chart above). This was correlated with a sharp rise in the Euro to nearly USD 1.60. The Canadian dollar was flat during this period, as if the price of oil did not influence CAD.

Now obviously this is a simplistic approach to looking at exchange rates, but it is informative. Movement in the US dollar appears to be the primary driver in the CAD/USD exchange rate. Undoubtedly there are other feedback loops, such as a drop in USD leads to a rise in the price of oil, which helps Canada's trade balance. And perhaps if Canada was not exporting oil from the Alberta Tar Sands, CAD would have followed USD lower this past decade.

But it appears that,the Canadian dollar hasn't strengthened, it's the US dollar that has weakened.

Edit: Some numbers from the chart above

Let's look at the change in CAD/USD, CAD/EUR and EUR/USD from 2002 to 2008 (2008 saw the greatest appreciation in both currencies and crude oil). Below is the average exchange for each pair for each year, plus the percent change.

CAD/USD - 2002: 0.637, 2008: 0.943, change: +48%
EUR/USD - 2002: 0.945, 2008: 1.471, change: +56%
CAD/EUR - 2002: 0.676, 2008: 0.642, change: -5%

*Canadian dollar exchange rate data from Bank of Canada, Euro/USD exchange rate data from the ECB website. Euro/USD monthly exchange rates calculated as the average of the first 21 trading days from the start of the month.

Oh Canada

2009-02-14T16:23:00.003-07:00

There's been a spate of articles on Canadian banks this past week -- perhaps that's a sign to sell. But here's a look at the market capitalization of North American banks from Yahoo Finance. RBC is number 3, while TD and BNS are numbers 6 & 7. For some reason Bank of Montreal doesn't show up on the list, but their market cap is about $12 B, which would put them tenth spot.

Looks like we might rally for a bit

2009-02-03T20:29:00.003-07:00

Vix is a pretty reliable indicator of whether equities are in an uptrend or a downtrend. In particular, when Vix is below its 20 dma, the markets usually are rallying. Today, Vix once more broke below its 20 dma, and by the looks of it, Vix is heading lower (top panel).

The equity-only put/call ratio (CPCE) confirms this viewpoint. The 9 EMA of the put/call ratio after rising last week, appears to be heading lower, which is bullish for equities (blue line, second panel).

I've picked up another technique for utilizing the CPCE to mark intermediate tops and bottoms from Cobra's Market View. It involves drawing descending trendlines from highs in the CPCE (which correspond with lows in equities). After these highs in CPCE, the markets tend to rally, leading to successive lower highs in CPCE and hence the descending trendline. When CPCE finally breaks above this trendline, that marks an intermediate-top. The technique appears in the second panel, with the raw CPCE as the grey line. Also, the technique only works with closing CPCE numbers; intraday spikes don't count. For a better explanation of the technique, see Cobra's post.

Both Vix and CPCE are presently suggesting that equities are rallying. This picture could change with one hard day of selling, but till then, I'm long.

I would like to see the Yen weaken, but Treasuries have been selling off, and that is also supportive of equities.

CPCE analysis -- is the top in? is the bottom in?

2009-02-02T09:47:00.003-07:00

This is in response to a nifty put/call ratio analysis presented by the Financial Ninja. His analysis uses the CBOE put/call ratio and suggests that a top is being put in, not a bottom.

I prefer the CBOE equity-only put/call ratio, which I think might give a truer signal of traders intentions. I've repeated The Financial Ninja's analysis using the equity-only ratios ($CPCE on Stockcharts instead of $CPC).

Like the Financial Ninja's method, this method does a good job of identifying the majority of tops and bottoms since 2007. A closer comparison of the two ratios might suggest one or the other is better a picking up a couple of the highs and lows around the turn of 2008.

The real difference in the methods, however, is the $CPCE is not let looking like it will call a stop (it's close, having started to turn over, but its not quite there).

I'm not sure which indicator is more accurate, although I am partial to the equity-only put/call ratio

Fed's Open Market Operations

2009-01-29T21:52:00.002-07:00

Amazing picture which I have to repost from Alea's FRBNY: Domestic Open Market Operations during 2008

Credit indices

2009-01-29T18:34:00.007-07:00

The Credit Default Swap indices have been improving this. Even with today's sell off, these indices appear to be heading south -- which should be supportive of equities.

Here's the US Investment Grade Index (from Credit Derivatives Research). By the looks of it, this index put in a lower high -- a lower low would be bullish

CDR's US High Yield index is on the right, a head
and shoulder's formation.

CDR's Europe Investment Grade Index is on the left. Another head and shoulder's formation.

CDR's Europe Crossover (mostly high yield) is on
the right. This is the worst performing index --
it has not yet clearly turned over, a new high would be bearish for equities.

In spite of today's sell off in equities, all four of these indices have signs of improvement.

Markit's ABX and CMBX's indices were also showing signs of improvement, but today they paused. Here's Markit's CMBX-NA-AAA 4 index , it bounced off of the previous lows.

10 year yields jump

2009-01-29T18:27:00.003-07:00

The Fed announced that they were "prepared to buy Treasuries" and it appears the market wants to test how serious the Fed is. In the words of Across the Curve, "tarders are now enganged in a game of financial chicken with Federal Reserve as traders attempt to force the Fed's hand." And with that, 10 year yield jumped today.

It is unclear as to whether this is supportive of the broader stock market. Have yields jumped because of excessive supply? Or are increased yields indication of a broader appetite for risk (and yield)?

Signs of improvement - ABX & CMBX indices

2009-01-24T20:13:00.004-07:00

As I posted on Thursday, Markit's ABX and CMBX indices have been strong this past week, with both indices pulling back before reaching the extreme levels reached last November.

Markit's AAA ABX indices appeared to have made a higher low last week, but after nitially advancing, have paused. Still, these indices are showing positive divergence to SPX. Here's Markit's AAAA 07-2 series, with SPX (from Stockcharts) superimposed in green

Similar story with Markit's CMBX indices, although these indices have continued to improve all week. Here's Markit's CMBX AAA 4 index (which shows price). I've superimposed the inverse of SPX in blue. Again, note the divergence.

Signs of improvement

2009-01-24T17:57:00.005-07:00

While the bad news has been relentless these past few weeks, there have been signs that a recovery is just around the corner. Numerous correlational indicators have improved markedly since New Years, even in the face of the weakness in equities these past two weeks. These indicators include:

A huge decline in the A2/P2 spreads in 2009 (Calculated Risk) indicating that credit is beginning to flow again;

An increase in M3 Money Supply, indicating that the Fed's efforts to reinflate are getting traction;

An increase in 10 year Treasury yields, indicating an increase in risk appetite;

Bullish moves in silver and crude, silver in particular has been tightly correlated to SPX;

A weekly drop in the cash holdings of money market mutual funds, which might indicate that cash on the sidelines is coming back into the markets;

Continued improvement in the BDI, suggesting that global trade is starting to recover;

And strength in Markit's ABX and CMBX indices, again measures that are correlated to SPX.

All this is bullish for equities, although some indicators are becoming overbought (like TRIN from Matt Trivisonno)

Signs of improvement - Money supply

2009-01-24T17:48:00.003-07:00

While there were signs that the monetary supply was contracting all of 2008, this contraction accelerated during and after the collapse of Lehman Brothers. The Fed has frantically tried to arrest this collapse by slashing the Fed Fund rate and through various liquidity schemes, moves which were mirrored to varying degrees by other other central banks. It appears that these moves are finally gaining traction, with M3 measures starting to increase again this past month.

Below is a chart of M3 from nowandfutures.com. I've added SPX (from Stochcharts) in red, note the correlation between SPX and M3 growth in blue). Growth M3 has accelerated this year, which, given the previous correlations, is bullish for equities.

Signs of improvement - 10 year Treasury yields

2009-01-24T17:16:00.002-07:00

Treasury yields, after plummeting through November and December, have been moving higher for the past month. The move up in yields this past week in the face of continued weakness in equities, suggests a slow increase in risk appetite.

Mind you, the increase in Treasury yields was also driven by in increase in issuance by the Treasury department, as well as Geitner's "China Manipulates" comments. Still, as the chart below shows, 10 year yields are strongly correlated with SPX, so last week's rise is bullish.

Signs of improvement - silver and crude

2009-01-24T15:32:00.005-07:00

Since last August, both silver and crude have been tightly correlated to SPX, with all three instruments being synchronized in the timing of their highs and lows. And while the heights of their respective highs and lows varied, the directions of their moves remain correlated. Silver and SPX, in particular, have been strongly correlated.

Below is a Stockcharts chart with silver and SPX in the top panel, crude ($WTIC) and SPX in the second panel, and silver and crude in the third panel. Note how the intermediate lows of the three instruments are synchronized, with silver's 52 week low being put in at the end of October, SPX's low on Nov 21st, and crude's low in late December.

Last week, silver managed to put in a lower high, and this past week, the metal put in a higher high, bullish signs that the uptrend will continue. This is in contrast to SPX, which was down on the week.

Crude, while not as strong as silver, managed a higher low before closing up for the week.

Given the past correlation to equities, these are bullish signs that stocks will rise.

Signs of improvement - changes in cash holdings

2009-01-24T15:16:00.002-07:00

Vix and More has his chart of the week: Change of Trend in Cash Holdings?

His chart, reproduced below, plots the size of Institutional and Retail Money Market Funds, which reached an all-time high last week. Their size is thought to reflect the amount of cash sitting on the sidelines, and this week showed the first meaningful drop in money market mutual fund cash levels since September. And as Vix and More writes, if the change in money market mutual fund levels from the past week is the first signs of a change in trend, then this will almost certainly have significant bullish implications for equities.

Signs of improvement - BDI

2009-01-24T14:59:00.006-07:00

Here's the Baltic Dry Index. It got absolutely decimated last year -- decimate is actually quite apropos and the index fell to less than 1/10th of its high. But it has been recovering since early December, up almost 50% from its lows.

Here's Stockchart's version of BDI, on a log scale. The drop is horrendous, but at least the index is improving

InvestmentTools.com has another version the BDI, with lots of charts

Markit Indices are bullish

2009-01-22T19:03:00.005-07:00

While the financial sector imploded over the weekend, both the asset-backed and commercial mortgage backed bonds seemed to have turned a corner last Thursday, at least according to data provided by Markit

This should bode well for equities, as both of these markets are highly correlated with stocks.

Here's Markit's commercial mortgage backed AAA bonds index -- node th spreads have been pulling back since last week

And here's Markit's asset-backed AAA bonds index -- prices have rallied since last week.

For reference, here's SPX over the same timeframe

Is the bottom in?

2009-01-21T22:28:00.003-07:00

Vix is signalling that we are very close to the bottom. Vix after spiking way above its 20 day BB pulled back across its 10 dma. That's bearish for Vix and bullish for equities.

As well, the Yen spiked up to its highs from January and then sold off, putting in a shooting star candle, and that's bearish for Yen and bullish for equities.

Treasuries continued to sell today, although possibly a bullish candle, but IEF's BB's are pointing down, which is bearish for IEF and bullish for equites.

So it look the bottom is in -- almost. To confirm it, we need Vix to break its 20 dma (singalling that there's an uptrend in equities) and we need the put/call ratio to roll over decisively.

For all that to happen, we need one more up day in equities -- maybe AAPL will seal the deal and confirm the bottom

Vix - put/call ratios - Yen - IEF

2009-01-21T08:04:00.003-07:00

After Vix's move well above its 20 dma, it has pulled back, as expected. Now the question is whether this pullback is the start of down trend. The next barrier for Vix is its 10 dma, and after that the 20 dma.

The put/call ratios have yet to turn over -- actually the equity-only ratio looks like it topped last Thursday, but I'd like to see a more decisive move down before saying that it's called a top.

The Yen are moving sideways, neither bullish nor bearish, while Treasuries have been selling off, which is bullish.

It's promising that the bottom is in.

Vix - put/call ratios - Yen - IEF

2009-01-20T09:30:00.003-07:00

In the past, when Vix spiked outside of its 20 day BB, it marked bottoms. This rule broke down last October during the forced liquidation, but even then, it was pretty accurate at marking short term bottoms.

Yen and TLT/IEF helps confirm these bottoms, although these two instruments are not as tightly correlated, often turning before or after the bottom.

The put/call ratios can also help track these bottoms, with the 9 EMA of each rolling over at important turns.

Vix spiked across its 20 day BB last Thursday, and pulled back on Friday. Both Yen and IEF rolled over at the end of last week, which gave a good bottom signal. The put/call ratios started to roll over, but have not followed through today, and we are still in search of our bottom.

But Vix is above its 20 day BB. Bottoms happen at these levels. Unless we enter another period of forced liquidation like last October, the bottom is near.

Retail Sales

2009-01-14T23:37:00.005-07:00

A rundown of the retail sales numbers released Today (Jan 14, 2009) with some historical perspective

CNN details the horrific results:

"Holiday sales posted the biggest decline on record falling around 3.5%," wrote Anika Khan, an economist for Wachovia. "Sales have been primarily driven by extensive discounting which is hurting retail profit margins."
Some of the decline in sales can be attributed to falling prices. The figures are not adjusted for price changes, but they are adjusted for seasonal variations. Economists believe consumer prices fell 0.8% in December; U.S. inflation data will be released on Friday.
Retail sales last month were down a record 9.8% compared with December 2007, the Commerce Department's data showed. Sales excluding autos fell a record 6.7% in the past year.

Calculated Risk, in their Retail Sales Collapse in December post provide this chart -- now that's cliff diving.

And Econompicdata provides a sector breakdown chart of December '08 vs. December '07 (not seasoanlly adjusted).

Update: The Financial Ninja adds this figure on retail and food services sales -- after nearly 20 years of steady growth, what a huge drop

Update (Jan 16, 2009): Econompic Data has this chart of CHinese exports

Commercial Real Estate and CMBX index

2009-01-14T23:14:00.003-07:00

Calculated Risk commented on the Fed's Beige Book release noting that the "other sections of the beige book are negative too - but CRE is being crushed"

Meanwhile, Markit's CMBX indices are starting to go vertical again. Here's their CMBX-NA-AAA 4 series

McClellan Oscillators giving sell signals

2009-01-14T21:27:00.004-07:00

The McClellan Oscillators for the NYSE and for NASDAQ gave sell signals today. Both oscillators crossed over the zero line, and both summation indexes have begun turning over. Interestingly, both summation indexes have turned over as they've approached trend line resistance.

The McClellan Oscillator does a good job in marking short-to-intermediate term tops. On occasion, such as the winter of 2007-2008, these tops last 1-2 weeks, but often the tops are more lasting.

This is a bad sign for equities.

The top panel contains the NYSE McClellan Oscillator, the second panel contains the NYSE McClellan Summation Index and the third panel displays the NYSE. The fourth, fifth and sixth panels are the same but with NASDAQ.

Vix is starting to look toppy

2009-01-14T21:19:00.003-07:00

Vix today spiked up to its upper 20 day BB and then reversed. Vix often reverses from these levels, although a change in trend usually requires a spike across the 20 day BB.

Vix is also above its 10 day BB. Reversals happen from these levels as well, but the BB can also act as support.

Both treasuries and the Yen were up today, but not decisively so. The trend in all indicators is up, but Vix is looking toppy.

Today's Vix candle might be hinting at a reversal, but its wick is shorter than its body. The alternate interpretation is to view Vix as an equities overbought/oversold indicator, with the pullback in Vix today relieving some of the overselling.

While the overall trend in these indicators is still up (and the trend in equities is still down), Vix, TLT and the Yen are hinting that a retracement may be in the cards.

WIll EUR/JPY lead equities?

2009-01-14T20:40:00.004-07:00

The currency pair EUR/JPY is a great risk-aversion indicator, and often a great tell for where equities will head. Below is Stockcharts chart with SPX in the top panel, EUR/JPY (as $XEU:$XJY) in the second panel, EUR/USD (as $XEU) in the third panel, and the US Dollar index in the bottom panel.

Note how sell offs in EUR/JPY correlate with (and even lead) sell offs in SPX.

Since early October, EUR/JPY has tested the 1.17 level five times, with each successful test leading to a short-term bottom in equities. EUR/JPY is again testing the 1.17 level. For the sixth time. A breakdown would portend further weakness in equities, but a succesfull test might mark another bottom in SPX.

Individual Equity Allocations at Lows

2009-01-13T20:04:00.002-07:00

From Toro's Running of the Bulls

From The Big Picture

I saw a similar graph last week at my office which juxtaposed individuals' asset allocations to equities and cash relative to levels of the stock market. Cash holdings are at relative highs while equity holdings are at relative lows.
At such previous levels in the past, the market was near a significant bottom.
That does not mean we are at a significant bottom now necessarily. But I am just saying...

Shiller's cyclically adjusted price-earnings

2009-01-13T03:26:00.003-07:00

From

Hallelujah: Stocks Finally Undervalued (Shiller) (Clusterstock)

Stocks have finally dropped below fair value...for the first time in 17 years.
As we've often noted, Shiller's valuation method--cyclically adjusted price-earnings (CAPE)--is one of only two long-term stock valuation measures that have meaningful predictive ability (the other is a measure of replacement value called "Tobin's Q"). CAPE averages 10 years of trailing earnings and thereby mutes the impact of the business cycle, which otherwise distorts price-earnings ratios.

For the past 17 years, according to Professor Shiller, stocks have remained persistently overvalued, sometimes violently so. In the past two months, however, they have finally fallen below their long-term average.

Specifically, the average cyclically-adjusted PE for the past 130 years has been 16X. At the end of December, the S&P 500 was trading at 15X.

So does that mean stocks are going to go straight up from here? Absolutely not. As the last 17 years have shown, the gravitational pull around fair value over the short-term is weak. After past market peaks of this magnitude, prices have usually spent decades below fair value, and we expect we'll likely see the same pattern here.

As the accompanying chart shows, however, over the long haul, the reversion around the mean is powerful. And it suggests that, over the next couple of decades, the S&P 500 will deliver an average long-term return (6%-7% real).

See also: http://clusterstock.alleyinsider.com/2008/11/likely-s-p-500-bottom-600-down-40-from-here

World markets look weak

2009-01-12T21:11:00.005-07:00

Here's an update of FXI, EEM and EFA. All three look weak, having broken down out of bear pennants. But there are subtle differences between the three markets, with the breakdown in FXI looking much more severe.

Notice the breakdown in FXI has taken this ETF well past the first level of support, while in EEM, the ETF is at support. Meanwhile, in EFA, the ETF is still above support.

Is China leading this downturn?

Vix, Yen and TLT

2009-01-12T20:20:00.003-07:00

Vix today jumped 7% closing well above its 10 day upper BB and above its 20 dma. This trend is disturbing for equities with Vix above its 20 dma has been associated with a down trend in stocks.

The move up in Vix coincided with further strength in Yen as well as in Treasuries. The Japanese Yen has strengthened 5% since early last week, a giant move in the world of currencies. By the looks of it, FXY is going to test its upper BB very soon.

TLT, after hovering around 112 all week, seem sto have broken north. IEF (Barclay's 7-10 year Treasury fund) moved up strongly today as well.

I suppose these results are not surprising, given the weakness in equities. What is more of a concern is that each of these signals have more upside before reaching resistance, suggesting that there will be further weakness in equities.

But it is interesting that VIX/VIX did not rise today, although I am not sure what to make of it. In November VIX/VXV was flat over the middle portion of the month, wihle equities were down.

Endgame for Citigroup?

2009-01-12T19:58:00.004-07:00

Citigroup got hammered today (-17.3%) after it was reported that they were in talks to sell a majority stake in its Smith Barney brokerage business to Morgan Stanley. The breakdown in Citi's chart looks ugly. A retest of its November lows looks probable.

But Citibank under $6 begs the question whether this bank can survive. Reports are already starting to circulate about the break up of Citi (Marketwatch, Felix Salmon at Market Movers, Information Arbitrage). These ideas gain traction as we approach the inauguration of the Obama administration, particularly as the next administration will not be ideologically opposed to the nationalization of a bank. To quote Felix Salmon:

I'd say p=0.3 right now that Barack Obama's first major act as POTUS will be the nationalization of Citigroup. Yikes.

put/call ratio -- the beginnings of a bottom?

2009-01-12T19:17:00.005-07:00

Last week the put/call ratio indicated that an intermediate top might be in place (in Is the put/call ratio calling a top?). Since then the markets have sold off and the put/call ratio has risen sharply. Now, the put/call ratio is starting to give hints that a bottom is about to form.

Below is a chart with the equity-only put/call ratio ($CPCE) in the top panel (along with its 60 EMA), and the 21 EMA of the same in the second panel, superimposed over $SPX. The third and fourth panels contain the entire CBOE put/call ratio (that's equity+index, $CPC).

When the equity only put/call ratio has risen above 1.04, there has generally been a bottom. Usually these bottoms have held for quite some time, but in March, the bottom held for a week, while in September, the bottom held for 3 weeks. None the less, bottoms. Well the $CPCE is again above 1.04.

Mind you, CBOE's entire put/call ratio ($CPC) has not risen nearly as sharply as the equity-only ratio. The equity-only ratio seems to be more accurate at calling tops and bottoms, but it would be reassuring if we got a confirmatory signal fro the entire CBOE put/call ratio.

Also, if you look closely, you can draw some parallels in the $CPCE struture at each bottom. In particular, there tends to be a prolonged period where the $CPCE is above its 60 EMA. While this formation doesn't uniformly call bottoms, it's pretty good at marking turns in equities. One of these formation may presently be forming in the ratio.

Breakdown in banks?

2009-01-12T08:24:00.003-07:00

The banks sold off this morning. While it is still early in the day, it looks like there's a breakdown in banks. There's a sell signal from the MACD and the RSI just put in a lower low. Meanwhile the banking index broke below support from the lows of early December.

However, the banking index is very oversold, and three of the heavyweights, BAC, C and JPM are siting on support. Perhaps one more move down is needed to confirm this breakdown

A bounce in banks?

2009-01-11T21:44:00.004-07:00

While I am pretty bearish on equities in general and banks in particular, here's one bullish alternative that I can't seem to ignore. Banks could be due a bounce.

Ariel, over at Unbiased Trading, gives the bearish alternative.

Bubble in Treasuries?

2009-01-09T12:36:00.002-07:00

There has been a lot of talk about the bubble in Treasuries, but there's good reason to think that that talk is overblown. Here's a FT Alphavile summary of a Goldman Sachs note arguing that there's no bubble in US Treasuries.

What is Goldman's basis of argument?

Long-dated Treasury yields are first and foremost driven by the expected rate of inflation. The US economy is in a tailspin, and as the Fed acknowledged in the minutes they released,we'll have "disinflation" until at least 2010;
While there is the potential for "bond vigilantes" to demand higher yields, the Fed has already warned the market that they will buy Treasuries if necessary. In other words, if Treasury prices do start to collapse, the Fed will buy, and support prices. The Fed will do this to maintain the lowest possible rates in the economy;
While the supply of Treasuries will increase sharply, this probably won't cause an absolute increase in yields. Indeed, there's very little historical evidence that a greater supply of gov't paper has a meaningful impact on bond yields once macroeconomic conditions are accounted for.

Read the FT Alphaville's summary of Goldman's note for more details.

But also, consider the Japanese experience. 10 year yields fell from a peak of 8% to a low of 0.5% during their lost decade episode. And that occurred in the face of some core CPI inflation.

Above graph from an excellent Martin Wolf piece,‘Helicopter Ben’ confronts the challenge of a lifetime, from Dec 2008.

Vix, Yen and TLT -- Vix is still finding resistance

2009-01-09T11:28:00.003-07:00

Payroll numbers came in as expected, but the unemployment rate jumped. This, along with the poor economic releases out of Europe, set a negative tone, and the markets fell right after the opening bell.

Potentially, if SPX cracks 890, we could have the start of another downleg. Early this morning, it looked like SPX would break. The Japanese Yen was up sharply at the open -- this often signals equity weakness. Within hours, TLT followed the Yen up, another indicator that stocks would weaken. But Vix has risen only slightly, and once again is finding resistance at it upper 10 day BB.

There are still a few hours left before the markets close, but the longer Vix fails to break above is 10 day BB, the greater the chance that equites will bounce.

Global indexes hitting resistance

2009-01-09T03:07:00.009-07:00

Others have suggested that the bear market in global indexes has further to run (i.e. China: Fun Bear Market Rally from The Financial Ninja) but a quick look at the charts suggests that many indexes are hitting resistance.

I have not done a comprehensive survey, but here are the first four non-North American ETF's that I examined.

FXI (iShares FTSE/Xinhua China 25) -- here's 18 months of data, with a descending trendline from the Oct 2007 highs still in play. FXI has retraced 23.6% of the fall from the highs, in a possible bear flag structure, with descending volume. It was just sharply rejected from the Fib after poking above the trendline. Now for the test of support.

EEM (iShares MSCI Emerging Markets) -- similar story to FXI, with some subtle differences. The trendline that's in play is from the May highs, and EEM has poked above this trendline on a few occassions, including two days ago. The bear flag is also clearer on this chart.

BKF (iShares MSCI Brazil, Russia, India, China) -- similar story to FXI and BKF (no suprise) but a more bullish chart as BKF broke out above the down trendline before being rejected by the 23.6% Fib. This last move could easily turn into a kiss back of the break out point before this index moves higher.

Th breakout in BKF is an interesting divergence from EEM and FXI especially as these three ETF's have many similar components. The snap back in BKF is partially caused by the Indian stock market, whcih has been rocked by an accounting fraud scandal these past two days.

Moving to the developed markets, here's EFA (Europe Australasia Far East Index iShares). A simiarl story to EEM, with a dscending trendline, once pierced, but still in play. The fib that seems relevant is from the May highs, not the 2007 highs.

Citibank, Option Expriy Week, Max Pain and Earnings

2009-01-08T22:59:00.004-07:00

From FT Alphaville

Citi in $1.4bn loss over LyondellBasell

Posted by Gwen Robinson on Jan 09 05:50

Citigroup is to suffer a $1.4bn loss on its loans to LyondellBasell, the chemical group that placed dozens of its subsidiaries under bankruptcy protection this week after failing to restructure $26bn in debt. More…

Citigroup is to suffer a $1.4bn loss on its loans to LyondellBasell, the chemical group that placed dozens of its subsidiaries under bankruptcy protection this week after failing to restructure $26bn in debt. Citi’s loss, to be recorded in Q4 results mainly as a loan loss reserve, will put further pressure on its Q4 earnings, to be announced Jan 22. Citi on Thursday said its gross exposure to LyondellBasell, which is controlled by billionaire Len Blavatnik through his Access Industries, was $2bn. However, Citi has already taken about $600m in writedowns and reserves over the past few months.

Could be that Citi will be under pressure before earnings are declared.

Options expire in January on the 16th, before Citi declares earnings. Often, there's a bounce in the stock market during options expiry week, some people call it the Max Pain Effect. I wonder how much of this bounce is due to earnings releases.

Most earnings releases come out either during option expiry week, or the week before. During the last year, several of the crack-ups seen in the markets occurred in direct relation to earnings. For instance, both BSC and LEH failed just before their scheduled release of earnings.

The option expiry week bounce might just be an aretfact of earnings coming out the week before option expiry.

Which brings up back to Citi and it's earnings. They come out the Thursday after option expiry. Maybe we won't see the option expiry week bounce this month.

Vix, Yen and TLT -- vix running into resistance

2009-01-08T17:39:00.003-07:00

Vix ran into resistance at its upper 10 day BB today, while the Yen strengthened sharply. TLT was more or less flat for the day, not following the Yen higher.

Vix was setting up a nice reversal pattern to the upside with yesterday gap up and big white candle -- today's candle is more uncertain, not quite a bearlish shooting star, but not quite a bullish white-black harami. Same story with SPX.

The Yen direction is also up in the air -- in isolation the past few days look very bullish, but taken in context with the move down from the highs, this latest moves, retraces 50% of the drop, and stopped at resistance.

Let's see how the markets react to the payroll numbers tomorrow -- for the past year, tyhe market has sold off the day payroll anticipating weak numbers. But this year there was no sell-off (although perhaps Wedensday's down counts?)

From Wall Street Journal's Marketbeat Blog
The Pre-Jobs Selloff

Month Covered	Dow Change	Jobs Change
June	-166.77	-100,000
July	-205.66	-67,000
August	-344.65	-127,000
September	-348.22	-403,000
October	-442.48	-320,000
November	-205.45	-533,000

Fed starts buying MBS paper, Markit's ABX indices drop

2009-01-08T17:08:00.005-07:00

Alea (a great credit-side blog) posted today that the Fed purchased $10.2 Billion of Mortgage backed securities. This move was pre-announced by the Fed and not a surprise. What surprises me though, is that asset-backed bond prices took a dive today.

Here's Markit's AAA 07-1 ABX index (which includes mortgage backed securities (from Markit's website)). Prices were off 10% today, a drop reflected in all of Markit's ABX-AAA indices.

Another example of buy the rumour, sell the news, but this time in the MBS market?

I wonder if this drop will have wider implications, especially given the good correlation between the ABX indices and equities in general -- here's SPX over the time period as the above Markit chart

Or maybe the drop in stocks precipitated the drop in ABX?

UPDATE: John Jansen, over at Across the Curve, came up with a succinct explanation of why the ABX indices sold off yesterday.

January 8th, 2009 10:01 pm

... it appears that a bill to allow bankruptcy judges to alter loan balances has picked up a head of steam as Citibank broke ranks with other lenders and no longer opposes the measure.
Dealers report heavy trading in the various ABX tranches today and lots of cash selling. AAAs were down more than three points and some Penultimate tranches dropped over 4 points.

It would appear that the models by which some of this detritus trades does not have a variable for judicial fiat.

Some overbought charts from other blogs

2009-01-07T21:58:00.001-07:00

Cobra's got a post from Jan 6 with overbought signals from the NYSE Percent of Stocks Above 50 Day Moving Average, SPX Short-Term Volume Osc and Long-Term Volume Osc and the 4 Week New High/Low Ratio.

The Financial Ninja also has percent-of-stocks-above-50-day-moving average: overbought and
volatility-stretching-into-oversold and McClellan Oscillator, Super Overbought and Bullish Percent Index, Flashing Warning Signs.

Vix, Yen and TLT -- becoming bearish

2009-01-07T21:09:00.004-07:00

Vix, Yen and TLT are three of my favourite indicators for stocks, with all three having negative correlations with equities.

Vix, in particular, has some powerful predictive properties for equities. I find that the 10 day and 20 day Bollinger Bands (BB) help frame these properties.

Consider the 20 day BB and how vix oscillates between the bands. When Vix is in the lower half of the band, the trend in equities is up, and vice versa for the upper band. When Vix spikes outside the 20 day BB, that usually means an intermediate term top or bottom in the markets (last October the tops were very short term). These events are consistently followed by tests of the center of the BB, and usually lead to tests of the opposive BB.

However, many times Vix's behaviour is constrained by the 10 day BB, instead of the 20 day. So it helps to watch both.

Below is a chart of Vix, with both 10 day and 20 day BB. I also have the ratio of VIX/VXV in the same chart (VXV is the 3 month Vix). The second panel has $XJY (Japanese Yen) and GLD, while the third panel has TLT (20+ year Treasuries) and $SPX.

Vix jumped today, with both XJY and TLT finding support from their sell off last week and both starting to move up. These all correlated with the sell-off in equities. But if these trends continue, expect further weakness in stocks.

As noted on the chart, Vix did find resistance at its upper 10 day BB. Above this is the center of the 20 day BB. But if Vix makes it above these two, it probably means an extended downtrend in equities is in order.

And finally, we have the ratio of Vix/VXV. This ratio was trading at a discount since Christmas, it has since gone flat. This is normally bearish for equities as it implies investors are becoming more bullish on Vix.

However, the longer-dated Vix futures are still trading at a premium to the index, so perhaps the Vix/VIX ratio is not as bearish of an indicator.

Is the put/call ratio calling a top?

2009-01-07T20:33:00.005-07:00

The put/call has shown a pretty good track record of calling intermediate tops and bottoms. The ratio was giving overbought signals this month, but has just reversed. Indeed, the ratio may be signalling that the top is in.

Below is a chart of CBOE options total put/call ratio ($CPC in Stockcharts). The 60 EMA is superimposed in the top panel. The 9 EMA appear in the second panel superimposed over the S&P 100 index ($OEX) as an area. The third panel has the 21 EMA of $CPC, with $OEX as OHLC bars. Both the 9 EMA and the 21 EMA do a good job in picking out the tops and bottoms in $OEX, with the 9 EMA having a few more false positives.

Notice that the EMA's reached multiyear lows this past week, very overbought, before reversing. If this reversal is bona fide, then chances are, the top is in. Given how overbought this index is, the reversal likely is for real. Note, the equity only put/call ratio is not as overbought (see second chart).

I've also highlighted the structure of the $CPC index during the top in October 2007. The index has almost an identical structure this week, complete with the thrust up.

The put call ratio might be signalling that the top is in.

Here's the same chart using the equity-only put call ratio (30 months, instead of 18). Similar story, complete with "air pockets in the index, but notice that the EMA's are still above last May's lows.

Thoughts on ISEE part I

2009-01-04T14:13:00.002-07:00

The International Securities Exchange ISEE index reached a multi-year high just before New Years, reaching 206 on December 29. Here's a screen capture of the index since the start of 2006 (from the ISE website). The ISEE index has not been above 200 since early 2006.

And here's a look at the index since the end of July (same source)

I was curious about what this abrupt rise in ISEE might portend for the stock market, I downloaded all available ISEE data from ISE website (April 1, 2002 to Dec 31, 2008) and SPX data from Yahoo Finance on January 1st 2009. I then analyzed the data in either Excel or S-Plus.

My first concern is whether this rise in the ISEE index might be related to either Christmas or end-of-year effects. If Christmas or end-of-year plays a role in ISEE, then one would expect to see a similar effect each year. I compared each year's ISEE index over the course of the year. Here's a plot of the ISEE index broken down by year, with each year's data aligned to the end-of-year. Note the ISEE index began on April 1, 2002.

The daily mean, calculated by averaging the ISEE index from all years, is plotted as a thick blue line. It appears that the ISEE tends to rise towards the end of the year, peaking 10 trading days before the end of the year, which would be about a week before Christmas. However, between Christmas and New Years, there is not consistent trend. This year's ISEE rise above 200 can not be explained by end-of-year tendencies.

So what does this sudden rise in ISEE mean?

Here's a look at the entire history of the index (beige line), compared to the SPX (S&P 500, black line). In this chart, I've multiplied the ISEE values by 10 so that the index can be superimposed with SPX. I've added the 10 day moving average (10 DMA, purple line) and the 50 day moving average (50 DMA, navy line), as well as the average ISEE value over this time period (141, but on this chart, 1410, teal line)

While the ISEE index did reach a multi-year high before New Years, the 206 print is by no means exceptionally high for the index. Over the 2003-2006 period, ISEE was reguarly above 200 (2000 on the above chart).

Consider ISEE's 50 DMA in the above chart. From mid 2003 to early 2006, SPX rose and ISEE was above its mean value. From early 2006 to mid 2007, the stock market continued to rise, but ISEE was below its mean value. It would appear that the absolute value of ISEE is not related to SPX performance, or at least not obviously related.

However, on a shorter time scale, intermediate tops and bottoms in the stock market do appear to correlate with tops and bottoms in ISEE, or at least in ISEE's 10 DMA. In other words, ISEE's relative value appears to be related to stock market performance.

To try to illustrate this, I've plotted SPX since April 1, 2002 against the 10 day EMA of ISEE, with this value multiplied by 10 so that both indices are on the same chart. By using the EMA instead of the SMA, the moving average has less of a lag.

Here's the same chart looking at the 2007-2008 period only.

Tops and bottoms in SPX seem to correlate well with tops and bottoms in ISEE. I'll take a look at ways to trade based on ISEE in a later post.

ISM and SPX

2009-01-04T10:17:00.001-07:00

Vix and More has an excellent presentation in his chart of the week: ISM Plummets. The chart, modified below, captures the ISM and SPX from 1950. Vix and More highlighted how the chart was plumbing depths only seen three times before during the serious recessions of 1949, 1974-75 and 1980. Moreover, the most recent ISM report's new orders reading was lower than ay time in its 60 year history, suggesting further weakness ahead.

Wonderful chart, but one thing that struck me is how poorly correlated the ISM index is to stock market bottoms. Often, both SPX and ISM dip in the same year, but in general SPX bottoms before the ISM index reaches its lowest reading. In other words, ISM normally appears to lag SPX. I've highlighted numerous such examples in green.

Also, on multiple occasions, the ISM index dropped without a "large" drop in SPX. In these occasions ISM fails to predict SPX. Several of these examples are highlighted in blue.

There are occasions where the drop in ISM leads the drop in SPX. I've identified three, highlighted in red, which occurred in 1960, 1982 and 2002.

In general, drops in the ISM index do not appear to predict further stock market weakness. In most cases, SPX has already bottomed and is rallying by the time ISM makes a bottom. It would seem that equities had already anticipated the bottom in the ISM and had subsequently advanced. I would be cautious in using the ISM index to predict further stock market weakness.

Mind you, there are three examples where the ISM lead SPX down: 1960, 1982 and 2002. Maybe 2009 will play out like these years. Perhaps there is some common macro-economic link between these three events and today? The 1960 recession began with a housing bubble burst, 1982 was the Volker recession caused by high interest rates, and 2002 was part of the tech-bubble crash. If there's a link, it's not obvious to me.

One last observation. All three of these recessions, if you look closely, had stock market rallies between the first and final lows of the ISM index. In these cases, perhaps, equities failed to anticipate the continued weakness in the economy and subsequently fell again. Perhaps there is a common link with today's situation?