Still a Bull
Still a Bull
While some of the economic data released this week looked a little weak, there was one bright spot; the upward revision to U.S. Q1 GDP growth from 0.8% up to 1.2%. Although 1.2% GDP growth seems low, it needs to be read in the context that Q1 and Q2 GDP growth are normally sub-pare and that the whole year’s growth rate is likely to be much higher. The Atlanta FED forecast stands at 3.7% GDP growth (chart below).
Even though this estimate can be considered too optimistic, it at least says that there is no real threat of recession in the next three quarters and, therefore, no reason to expect a bear-market to start within that time frame.
The market continues to price in an 83% probability of a rate hike at the June meeting (chart below).
Meanwhile, the large speculators have gone from heavily shorting the 10-year treasury futures, to piling in on the long side (chart below).
This long positioning implies that these speculators expect rates to drop in the future, since Treasury prices move inversely to the interest rate. This, of course, is in contradiction to what the market in general is pricing in (see FED above). This positioning by the speculators may very well be a contrarian indicator, judging by how wrong they got it earlier in the year when they were historically short the 10-y (expecting rates to rise). They were literally caught with their shorts down when rates took a tumble instead of going up as they expected. The reverse may be about to happen if rates rise and 10-y prices collapse.
As we have been pointing out, it is normal for rates to be rising during a bull-market, just as it is normal for GAAP earnings, and industrial production to rise during bull markets. So, we do not see rising rates as a fundamental impediment to rising equity prices.
Having said that, we continue to expect a pull-back in equities that we will use to increase our long positioning.
Equities
The AAII investor sentiment indicator rebounded this week: bull sentiment increased 9% up to 33%, and bearish sentiment decreased 4% down to 30%. Readings of less than 50% bulls are not associated with market tops.
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The put-to-call ratio continues to drop, which correlates to rallies in the SPX; every time the 8 moving average peaks and turns back down, the SPX has rallied. (chart below).
The Rydex bear-to-bull asset allocation ratio rebounded off historically low levels, but now continues to move lower. Although low levels indicate market tops (blue rectangles on chart below), the topping process can take many months to complete, like it did in 2000.
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The VIX volatility index continues at historic lows (lower than even in 2007) which suggests that there is over-the-top complacency in the market, but which runs counter to the fear demonstrated by other measures such as individual investor sentiment (AAII index) and the CNN Fear and Greed index which are fearful or neutral. This dissonance, may be explained by the increased use of ETFs as a means of hedging, instead of options. In any case, an increase in volatility would not be unexpected, even though it would likely only be temporary (chart below).
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Gold
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The long-term view is still within the head-and-shoulders triangle. A close above $1300 would put this pattern into doubt, and a close above $1400 would confirm a new up-leg in the gold price, but for now, the probability of lower future gold prices remains above 50% (chart below).
Gold is recovering from a technical over-sold position, so this rally is not unusual (chart below). Having broken above $1260 resistance, the next stop is $1300.
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The commitment of traders report (good through Tuesday) shows that large speculators increased their long positions, and the commercial traders increased their short positions, but the levels are neutral (chart below).
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The USD/JPY FOREX ratio has eased-off (as we expected) back down to the 38% retrace line and should now resume its move higher (chart below).
Inflation continues to be contained and should limit the upside of gold (chart below).
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We wish our subscribers a profitable week ahead, and ask that emails be monitored for Trade Alerts.
Regards,
ANG Traders
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Recently closed positions:
Mar. 30, 2017 Long UVXY$13.60 Apr. 13, 2017$19.05 +40%
Apr. 19, 2017 Long JDST$15.66 Apr. 25, 2017$19.71 +26% (1/2 position)
Apr. 19, 2017 Long JDST$15.66 Apr. 28, 2017$19.15 +22% (1/2 position)
Feb. 1, 2017 Long ZSL$32.13 May 4, 2017$35.91 +12%
Mar. 13, 2017 Long GDXJ May 19/17 $35 PUT (2% allocation)$2.59May 4, 2017$5.05 +95%
May 5, 2017 Long SHOP$82.87 May 10, 2017$92.70 +12% (1/2 position)
Apr. 28, 2017 Long TSLA Sep 15/17 $305 CALL option (5% allocation)$30.50 May 10, 2017 $38.50 +21%
May 15, 2017 Long JNUG$19.28 May 18, 2017$19.12 –0.8%
Disclaimer:
ANG Traders makes no guarantees concerning the profitability of our trades. Our trade notification service is not intended as investment advice in any way. It is simply providing information about the trades we ourselves are executing. Always consult a registered advisor for assistance with your investments. ANG Traders assumes no liability for any losses that may arise from replicating our trades.
Source: Nicholas Gomez
