Sunday, August 17, 2008

Currency update week ending 15 August 2008

Another wild week in the currency markets with the US dollar showing an unbelievable amount of "relative strength".

The reason I use this term is because it must be understood that there is no such thing as a "rising" currency. All paper currencies fall continuously due to ongoing monetary inflation (which is primarily a function of central bank currency creation). It is the degree to which one currency is falling in relation to another currency that determines its relative value.

It is useful to think of currencies as bricks all thrown from a tower of infinite height. As they accelerate downwards, they maintain the same relative position to one another.....but they are all falling none the less. If you were standing on one brick you would see the brick beside you maintaining the same relative position (and thus neither "rising" nor "falling". However, should one brick hit some denser air or collect something on it that changes it's frontal area, it would fall at a slower pace relative to it's neighbors. As such, it would be viewed as "rising" if you were standing on the brick that was falling beside it. This is how it is with currencies.

The only "brick" that maintains a steady level over time is gold. The reason for this is because throughout history it has been accepted as a form of currency and cannot be "printed" or reproduced. This allows it to maintain a "constant" value over time while the currencies it is priced in continue to fall over time. This is the reason why I maintain a set position in physical gold in my own portfolio irrespective of the day to day movements in the various currencies relative to gold.

The degree to which the USD has "risen" in recent days is almost unprecedented (the British pound is on its longest streak of consecutive losing trading sessions in 37 YEARS!). This is a very unusual event and it appears many were on the wrong side of the "short USD" trade and are now covering positions. The question is where do we go from here.


First chart is the 6 month daily candlestick chart (click on all charts to enlarge):



As shown last week, the USD has been on a parabolic ride since mid July. Since breaking above the previous level of resistance @ 74.31 it has been just about straight up.

From a technical perspective all indicators are bullish for the USD with the exception of the RSI(14) which is massively overbought and in need of a downward price correction.


Next chart is the 2 year daily candlestick chart to give a somewhat wider perspective:



It can be clearly seen how the level of 74.31-74.48 has fallen over the past 6 trading sessions. Also it is evident the longer term downtrend line I spoke about previous @ approximately 76.50 has been broken to the upside.

The MACD reflects the degree to which momentum has changed in the USD. Note the 2 previous peaks in momentum (Oct 2006 & Dec 2007) and how this current run up has blow well beyond the previous levels of positive momentum.

The next level of key resistance is now @ 77.04-77.85.


The next chart is the 3 year weekly chart which I use to identify medium term currency trends:



This chart turned USD bearish in April 2006 when the MACD crossed below the zero line. The USD has been in a steady decline ever since.

It is clear the trend line that has been in place since 2006 has been violated to the upside. Also note the positive ADX (14) cross (the first since 2005) and the MACD rising to attempt to cross the zero line. It has not crossed yet (closed Friday @ -0.021) but with the current momentum it is obvious this chart is indicating a longer term bullish trend in the USD has begun.


Next chart is the 10 year daily chart:




There are number of important things to note on this chart:

The key to note is price has broken above the trend line that was established at the beginning of 2002. This is a very significant event.

The market is severely overbought as indicated by the RSI (14) and in need of a pullback. In fact, it is more overbought now than at any time over the past 10 years (as indicated on the chart).

It is common to see price retrace a breakout to retest the trend line from above. As such, I expect the USD to soon reverse and hit the downtrend line from above. This would alleviate the overbought condition of the RSI and either:

a) set up a new up-leg and a long term bull market in the USD, or

b) fail and re-establish a new down trend.

It is too early to tell which will happen. What is certain is that the current pace of advance is unsustainable and the USD will fall in the near future. The question as to whether it is a new uptrend or a new downtrend will be answered when it tests the trend line.


The next chart is the Point and Figure charts for the USD. The first is the short term 0.1 box chart:



This chart went bullish on a price break of 72.50. Based upon the structure of the advance, it projected a price target of 74.50. This price has been exceeded by a huge amount and therefore it indicates the USD is in need of a short term correction.


The second Point and Figure chart is the Traditional with a more medium to long term view:



This chart went bearish back in April 2006 and has yet to turn back to bullish. When it turned bearish it projected a price target of 76.00. During the course of the decline the USD fell well beyond this level indicating it was oversold and due for an upward price correction. This has now occurred.


Next charts are the 3 year weekly charts of the Euro, British Pound and Australian Dollar with MACD buy/sell signals indicated:

Euro:



The Euro went to a sell signal this week. While there is a chance of a bounce due to the oversold condition, the trend from here is down.

British Pound:



The Pound has been on a sell signal since Dec 2007. Nothing has changed.

Australian Dollar:



The Australian Dollar is still technically on a buy signal.


The last chart is a long term chart of gold relative to other common currencies:



Gold has been on a nice uptrend since 1971 when the US came off the gold standard (allowing free printing of currency without physical backing of gold bullion). It has recently broken its 65 month moving average and can be considered in "correction" mode. It would not be a good time to be in gold if you were using it as a speculative investment tool.

However, if you are not a speculator and are a more long term "buy and hold" type of investor, gold may be worth looking at. There is an interesting calculator produced by the US Federal Reserve to calculate the value of the dollar. Let's say it is 1971 and the US is going off the gold standard. I have 2 possible strategies; take my $35 in US currency and put in my mattress or take my $35.00 and buy one ounce of gold bullion and put it in my mattress.

The results:

1) Today I go to spend my $35.00 in US currency. What will it buy today? It will buy $6.57 worth of goods and services.

2) Today I go to spend my 1 oz of gold. What will it buy today? It will buy $792.10 worth of goods and services.

Where do you think I would want my "spare" cash that is not invested in Real Estate, Stocks, Bonds, etc? Where do I put my "emergency" cash.......gold. It is not a "buy and sell" investment; to me it is a "buy and buy and buy some more investment" that provides the only protection from the ravages of inflation over time. This is why I believe everyone should have a small portion (minimum 5%) of your entire portfolio in gold.

Just some food for thought.

Saturday, August 16, 2008

Stock Market Update for week ending 15 August 2008

First, welcome to those who are new to the ECAM blog site.

Those who have followed the website for some time know my investment philosophy and writing style. For those who are new to the site, I recommend reviewing some of my previous blog posts to gain a basic understanding of how I use technical indicators to position my A and B account investments within the Provident Fund.

I plan on providing some links in the near future addressing some of the most commonly asked questions I get (the basics of how I utilize technical analysis in portfolio positioning, my personal investment strategy, etc) but in the meantime it would be beneficial to have a look at some of my previous posts to give you an idea of how I invest within the Provident Fund.

The most important thing I must stress to those who are new to the site is that the Emirates Provident Fund is a very benign investment vehicle that offers participants a very limited choice of funds (all "long funds") and therefore a very limited opportunity of substantial return on investment, especially in a period of declining equity prices (in discussions I have had with the EK Provident Fund administrator, this is by "design").

What you need to understand is that no fund (s) within the A or B accounts will ever provide any substantial capital gains without market timing due to the broad based structure of the chosen funds allowed within the A and B accounts (and also to a lesser degree the C account) and their mandate of being 100% invested at all times in the equity markets irrespective of the technical or fundamental nature of the markets. These are strictly "relative return" funds (which benchmark their performance based upon the performance of their chosen benchmark). As such, if the benchmark goes down 20% but the fund has only gone down 19%, they consider that a success. Not in my book it doesn't.

This is the reason why I personally have only the mandated A and B contributions within the funds (that I manage on an ongoing basis to provide for an "absolute" return) and have my personal "C" fund invested outside of Emirates in a discount brokerage account (that I manage on a daily basis).

If I had a choice I would have NO money in the Provident Fund but that is not possible given the Provident Fund structure. As such, it is my desire to maximize the limited potential that is available in the A and B accounts utilizing market timing through technical analysis. My personal "C" fund is held outside the Emirates provident fund and utilizes strategies that allow for capital gains during both market advances as well as declines based upon the same technical analysis techniques I use to manage the A and B accounts.

On another issue, I must apologize for the disjointed view of the website recently as the blog hosting site did a recent "product enhancement" and, in my opinion, they did nothing more than mess up the format that was in place. I plan on updating the layout of the blog to a more user friendly format in the near future but will not do so until I have the time (and can warn you in advance to allow you to confirm your email subscriptions are still going through when I reformat the site....there have been problems in the past when I switched formats and email updates were not being issued).

Enough of the admin......here is the latest update to what is going on.

To start with, here are the year-to-date returns for the funds I hold within the Provident Fund A and B accounts:


Core Holdings (currently approx 92% of portfolio):

Fidelity Australian Dollar Fund: +3.97%

Fidelity Euro Fund: +2.12%

Fidelity International Bond Fund: -2.38%


Ongoing Equity Purchases (currently approx 8% of portfolio):

BlackRock/MLIM Equity: -17.37%

Fidelity International Fund: -16.59%

Russell Global 90 Fund: -14.85%


Representative Charting Index:

Dow Jones World Index: -15.52%

Those that have been invested in currencies (the Euro and Australian dollar; not the UK pound) and the bond fund have done relatively well. Those invested in Equities have been hammered.

There has been a huge dichotomy within world stock market indexes the past several weeks.

In general, the U.S. equities have done rather well (my "summer rally thesis") but the rest of the world has done poorly. As a result, the Dow Jones World Index (which benchmarks our broad based A and B account provident fund equity indexes) has gone no where.

First chart is the Dow Jones World (DJW) 1 year line chart (click all charts to enlarge):



You can review my previous posts to go over the past technical indicators that turned this chart bearish.

To date nothing has changed in the technical indicators (bearish) but I must point out that the MSCI World Index-ex US (the bottom of the chart) has established a new low while the DJW index has not. The reason for this is that the the rest of the world is thought to be going into recession while the US may be near the end of its current recession. I do not agree.

U.S. market indexes have done fairly well over the past 2 weeks (which form part of the DJW index) while the rest of the world is in decline (hence the MSCI index has continued to decline). This is not a good sign for the A and B account provident fund equity funds as they are all broad based world equity funds. In other words, the US is doing ok but the rest of the world sucks. While a country specific fund (the US) may be on a buy signal, none of our A and B account funds are due to their more broadly based "world exposure".

In my last blog, I mentioned I was looking for a summer rally before another market decline. I also said I would not make any equity purchases until the chart/technical indicators indicated it was safe to move back into the markets. This has not happened in the DJW and we may be on the verge of another SIGNIFICANT price decline.

I have highlighted what is known as a symmetrical triangle that has formed over the past week in the DJW index. This pattern is well defined and has broken below the lower trend support line (as can be seen on the chart). What is important to understand is:

1) the symmetrical pattern was entered from above and therefore should exit below (as it has), and

2) normally if this pattern is confirmed, it indicates a "measured move" type of pattern (where the start is equal to the end), and

3) upon confirmation of the pattern (a break below the low @ 251.23) this would signal a continuation of the downtrend.

The bottom line is if price breaks below 251.23 we can extrapolate the move as follows:

-297.19 to 251.23 = 45.96 points

-a break below 251.23 leads to a target of 205.27 (251.23 - 45.96 = 205.27)

If the 251.23 support breaks that is where I think we are heading. That is further 18% from current levels.

I have not included the other charts I normally analyze as nothing has changed (they are all still bearish). It is still too early to commit to buying equities at this stage.

I am including a chart of the Fidelity International Bond Fund. I have maintained a 50% position in this fund for the past 6 months on the thesis that as the world goes into recession and central banks cut interest rates the value of international bonds will advance. This has worked well up until this week or so.

What changed this week is that the USD has had a significant advance and the Fidelity International Bond Fund is not currency hedged (in other words, the majority of the holdings in the fund are in non-US bonds and therefore non-US currencies). As a result, should the USD show continued strength going forward then the fund will decrease in value irrespective of the underlying correct thesis that world bond prices will advance (and individual country bonds are advancing in price in their own currencies).


It can be seen that this fund topped out towards the end of March. I have been watching for a retrace to the previous support low around of the support line at the 1.154 area. This week the fund broke this level and thus is technically in a bearish pattern.


Bottom Line:

There have been huge moves in the currency markets over the past week based upon the assumption that, while the U.S. is probably already in recession, the rest of the world may soon join them.

This should ultimately be good for bonds denominated in their "home currencies" (US treasuries in USD, Gilts in UK pounds, German Bunds priced in Euro's, etc) but with our provident bond fund being fully exposed to dollar strength (due to its un-hedged position), the upside looks limited.

Over the next week I will be repositioning my portfolio as follows:

-75% BlackRock/MLIM US Dollar Cash Portfolio
-25% Fidelity Australian Dollar Currency Fund

I will be doing so on any significant pullback in the USD (short term) with the view that the longer term trend of the USD has changed to bullish.

I will maintain my cash position until I have evidence that equity positions are safe to enter. There is no technical evidence to date that now is the time.

I will blog immediately when I make my changes.

Monday, August 11, 2008

Currency update week ending 08 August 2008

For the past week, the ONLY story worth watching was the movement in the U.S. dollar.

For the week ending August 08, the USD index gained 3.29%. To put this into perspective, this was the biggest single-week movement in the USD over the past 8 YEARS.

Here are the weekly stats versus major world currencies:



The reasons sighted for this move were numerous but in my mind it comes down to 2 things:

1) the realization that the Euro zone economies (and by extension the rest of the world as well) are in possibly even worse shape going forward than the U.S. is, and

2) the global asset rotation out of dollar based commodities (mostly oil but also soft commodities as well) and into financial instruments (banks, brokers, etc) and sovereign debt (mostly US 10 year treasuries).

The million dollar question is whether this is truly a bottom in the USD or merely another bounce along its ultimate road to the bottom.

To put this into perspective, I created a series of "XX vs USD" ratio charts going back 10 years. I find it useful to monitor these ratios’s to give me an idea of where we stand in the big picture (click on all charts to expand):


Euro vs USD




British Pound vs USD




Australian Dollar vs USD




Canadian Dollar vs USD



As can be seen, we are still above the long term trend lines in all the major currencies with the exception of the British Pound. As such, it is still inconclusive from the big picture view based upon ratios that this is the start of something big.

Next I want to zoom into specifically the USD Index. First the long term monthly view:



When everyone thinks about the USD decline they tend to refer to its most recent decline from 2002 to present. In fact, the USD topped at 160 in Feb 1985 and has been on a decline ever since.

Key points:

1) The rise from it's Sept/1992 bottom to it's Jan/2002 top retraced almost exactly to the 50% Fibonacci retracement level (50% Fib = 119.81, topped @ 120.24). As such, it could be expected when the USD finally does turn around we could expect a similar upward correction in price.

2) Strong resistance is located at the 79.12-80.81 price level. Until that is broken it is premature to get too excited about a USD rally.

3) It is worth noting the declining trend line and the 12 month simple moving average. A sustained break above both on a monthly closing basis would be an encouraging sign a true turn around is in place.


Next chart is the USD 3 year weekly candlestick chart:



Key Points:

1) It appears a double bottom may have taken place at the 70.70-71.31 price level. This is frequently the sign a bottom has taken place and is encouraging.

2) The ADX (14) has crossed to positive. The last time this occurred was Sept/2005.

3) Price broke through key resistance levels at 74.31-74.48. In addition price broke through the 50 week moving average @ 74.97. To have such a strong up week that breaks significant resistance levels is a very bullish sign.

4) Note price has been repelled at the declining trend line since Feb/2006. Numerous attempts to break above this trend line have failed. As such, this line represents the best indicator of whether this is truly a trend change or just another dead cat bounce in the USD. The price level of the trend line currently sits around the 76.50 level.


Next chart is the 10 year daily chart:



This chart nicely shows the declining trend line from 2005 that I mentioned previous. Until I see a closing price that breaks above this trend line the direction of the USD remains down.

Disregard the bottom indicators on the chart but note the top indicator; the 14 day RSI (relative strength indicator). This is an oscillator that is useful in indicating the degree to which a market is overbought (RSI>70) or oversold (RSI <30).

Note that the last time the RSI was at it's current level (80) was in April/2000. Following a reading of 80, the RSI rapidly declined to the low 30's taking the USD down by approx 6% before resuming it's up trend. I expect a similar thing once again as the USD is now severely overbought on a short term basis.


Next chart is the 6 month daily candlestick chart:


Key points:

1) RSI(14) overbought (circled in red, spoken about previous)

2) Longer term indicators (MACD and ADX) both bullish

3) Stoch embedded (this is where the Stoch stays >80 for more than 3 days and indicates a strong uptrend has developed).

4) Price has penetrated the top Bollinger Band @ 75.04. The BB is an algorithm that is calculated such that price remains within the bands 95% of the time. In other words, this is a "5%" event and strongly indicates price should decline to get back within the BB.

5) Price broke through key short term resistance @ 74.31 AND the 200 day moving average @ 74.19. This is very bullish short term.


Bottom Line:

The USD had a huge week (the best in nearly 8 years). It is questionable whether the move was based upon anything of a fundamental nature or was it merely a price correction for a very oversold dollar?

The technical indicators tell me we are due for a pullback from this level as this was a huge up move and price is currently overbought. When the pullback occurs, the key will be to watch the level of previous resistance that has now become support (74.31).

In order for the USD to be truly in a sustainable up trend, the following needs to happen:

1) price needs to correct back below its current level (in the process alleviating the current overbought readings on the RSI), and

2) price needs to hold above it's current support @ 74.31 on the pullback, and

3) once the pullback has occured and the overbought condition has been alleviated, price needs to break above the current downtrend line from 2005 (current near 76.50).

Should this occur then it can be safely assumed the USD has entered some sort of sustained up trend. Until then this correction has to be looked at as being encouraging but questionable.


My positions remain unchanged:

-50% Fidelity International Bond Fund*
-25% Fidelity Australian Dollar Fund*
-25% Fidelity Euro Fund*

*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary 1-2% from that posted.


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Sunday, August 03, 2008

Stock Market Update 03 August 2008

A routine update for the week ending Fri, Aug 01.

A very turbulent week on the markets but in the end very little change from my last blog entry. For the week the Dow Jones World Index lost 0.56% with no clear direction as to which way it wants to go from here.



I am still of the view we will see a good bear market rally very soon followed by a large drop into the fall (taking us below our most recent lows). I will wait for the technicals to let me know when it is right to enter to try to take advantage of the bear market rally.

I am generally not an "end of the world", "doomsday" type of investor; most who publish these sorts of views tend to be one's who want to stand out from the crowd to sell you their newsletter service (and tend to not make money in the markets).

The markets have generally been quite orderly and well behaved for several decades and there has been very little technical proof that "this time it is different". However, I think it is always wise to prepare for the worst and, given the dual crisis I spoke about previous that we are now facing (credit crunch/financial distress combined with a U.S. housing collapse), I am always on the lookout for indicators that tell me that in fact this time it is different.

In the course of doing some recent reading, I came across an article that I feel is deserving of attention. I was unable to put it in as a link so you will have to cut and paste the address to your browser to view it but it is very thought provoking and has me watching my indicators closely.


http://www.contraryinvestor.com/mo.htm


I would highly suggest you read it and think about how you are personally positioned should the "generational event" comes to pass this time around.

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