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Technically Speaking: Is The Risk Of A Bigger Correction Over?

Is the risk of a more significant correction over now that the expected 5% decline is complete? That was a hotly debated question after this past weekend’s…

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This article was originally published by Real Investment Advice

Is the risk of a more significant correction over now that the expected 5% decline is complete? That was a hotly debated question after this past weekend’s newsletter supporting the idea of a reflexive rally into year-end. As I stated:

“After a harrowing 5% decline, sentiment is now highly negative, supporting a counter-trend rally in the markets. Thus, we think there is a tradeable opportunity between now and the end of the year. But, as we will discuss below, significant headwinds continue to accrue, suggesting higher volatility in the future.

That comment sparked numerous debates over market outlooks through year-end. To wit:

So, who is right? A hard rally into the end of the year, or a major low?

While we certainly hope for the former, some risks support a further correction on both a fundamental and technical basis.

Fundamental Warnings

In Andrew’s comment, he suggests that economic growth will accelerate through the end of the year. If such is the case, that will support a pick up in earnings growth and outlooks that would bolster higher asset prices.

The problem with that view is two-fold.

In Q2 of this year, G.D.P. estimates started that quarter at 13.5% and ended at 6.5%. The third quarter started at 6% and is now tracking at 1.3%, as shown below.

As we discussed in “The Coming Reversion To The Mean,” the “second derivative” effect of economic growth is manifesting itself. To wit:

“We are at that point in the recovery cycle. Over the next few quarters, the year-over-year comparisons will become much more challenging. Q2-2021 will likely mark the peak of the economic recovery.09/24/21

Reversion Economic Growth, The Coming “Reversion To The Mean” Of Economic Growth

When writing that blog, our estimates were for a cut in growth to 3.9%. We are currently closer to 1%.

Secondly, fourth-quarter growth will also remain under significant pressure for several reasons:

  1. Year-over-year comparisions remain challenging.
  2. Manufacturing surveys look to slow in a challenging enviroment.
  3. Employment continues to quickly revert to long-term norms.
  4. Liquidity continues to turn negative.

The last point is the most problematic. The massive surge in economic growth in 2020 was a direct function of the massive direct fiscal injections into households. With that support gone, economic growth will revert to normality, particularly in an environment where wage growth does not keep up with inflation.

Given that earnings and revenue are a function of economic growth, the most considerable risk to Andrew’s fundamental view is slower growth and valuations.

Confirmed Weekly Warnings

When discussing the market, distinguishing time frames becomes critically important. As noted in the newsletter, we suggested the market got oversold enough short-term to elicit a rally.

The rally above the 100-dma and the trigger of both M.A.C.D. “buy signals” (lower panels) are supportive of a short-term rally over the next few days to weeks.

However, the sell-off yesterday is retesting that 100-dma and will turn it into important support if it holds through the end of the week. If not, we are going to challenge the recent lows.

It is not uncommon to see such counter-trend rallies, even powerful ones, during a longer-term corrective process. Such is an important consideration given the weekly “sell signals.”

The recent decline triggered both signals for the first time since the March 2020 correction. (The chart below is the same model we use to manage 401k allocations. You can see the related models and analysis here)

Since 2006, when we developed and started publishing this “risk management model” each week, the signals continue to signal critical periods for investors to watch. Market returns have a very high correlation to the confirmed “buy” or “sell” triggers.

There are also two other important points. First, the current signals are occurring at elevations we have never witnessed previously. Secondly, the confirmed signals are happening with the market at the top of its long-term bullish trend from the 2009 lows. Thus, a correction to the bottom of that long-term bullish trend channel will encompass a nearly 30% decline without violating the bullish uptrend.

Longer-Term Signals Suggest Caution

Again, even with the broader macro issues facing the market, we can not dismiss the possibility of a near-term reflexive rally. However, the monthly signals are also confirming the weekly alerts.

Monthly “sell signals” are more rate and tend to align with market corrections and bear markets. However, like the confirmed weekly signals above, the monthly “sell signal” was triggered for the first time since March 2020.

While the longer-term M.A.C.D. has not yet confirmed that monthly signal, it is worth paying close attention to. Historically, the monthly signals have proven helpful in navigating correction periods and bear markets.

Let me reiterate these longer-term signals do not negate the possibility of a counter-trend bull rally. As noted, in the short term, the market is oversold enough for such to occur.

Bullfights And Matadors

On the surface, it seems like “bull markets” are extremely difficult to kill as they keep rising despite the increasing number of warnings suggesting differently.

If you have ever witnessed a bullfight, the bull will keep charging the matador even though it has been continually impaled. However, even though the bull keeps trying to get his antagonist, it begins to slow from exhaustion and blood loss until the final blow gets dealt.

Bull markets are much the same. The advance will continue until it becomes exhausted, which is why it seems like bull markets end “slowly and then all at once.”

Currently, numerous internal technical and fundamental measures are providing warnings that investors are currently ignoring because the “bull is continuing to charge the matador.”

Such is why it is essential to align time frames with your portfolio management process.

If you are trading your portfolio with a relatively short holding period, you want to focus on hourly to daily charts. Currently, those suggest a near-term rally is possible.

However, if you employ a longer-term “buy and hold” type philosophy, you will want to pay attention to the longer-term charts. Those suggest the risk of a more substantial correction is increasing.

These longer-term signals suggest investors should be using such rallies to rebalance portfolio risks, raising some cash, adding hedges, and reducing overall portfolio volatility. Our best guess is that we are still in the midst of a short-term, sentiment (F.O.M.O.) driven bull market.

While it is entirely possible we could see the market rally back towards its previous highs before year-end, you need to decide if you want to be the “bull or the “matador” when it comes to your portfolio.

The “matador” walks out of the arena more often than not while the “bull” gets carried out.

The post Technically Speaking: Is The Risk Of A Bigger Correction Over? appeared first on RIA.

Precious Metals

Bitcoin Soars to Highest in 5 Months as Correlation With Gold Turns Negative

The price of bitcoin hit the highest in over five months, as an increasing number of traders dived into the
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The price of bitcoin hit the highest in over five months, as an increasing number of traders dived into the cryptocurrency in hopes that it would once again soar to the record highs witnessed earlier this year.

Bitcoin was up by more than 1% on Tuesday morning before settling to just above $56,000, marking a weekly gain of over 15% and the highest since May. The latest rally is the result of a number of factors, particularly the fading of concerns regarding regulatory efforts in the US and China, as well as the SEC potentially approving the first bitcoin ETF.

In the meantime, according to Ned Davis Research strategist Pat Tschosik, the one-year correlation between gold and bitcoin has been steadily declining, and is about to turn negative, suggesting that the prices are no longer moving in unison. “Bitcoin could be seen as the preferred inflation hedge if the dollar and real rates are rising,” Tschosik told CNBC.


Information for this briefing was found via CNBC. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Bitcoin Soars to Highest in 5 Months as Correlation With Gold Turns Negative appeared first on the deep dive.

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Economics

Stocks Stink As Curve Pancakes On Stagflation Fears

Stocks Stink As Curve Pancakes On Stagflation Fears

It was another choppy day in the market which saw an overnight attempt to recover from…

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Stocks Stink As Curve Pancakes On Stagflation Fears

It was another choppy day in the market which saw an overnight attempt to recover from losses get sabotaged at the open when a sell program knocked spoos lower and the result was a rangebound, directionless grind for the rest of the day as the continued pressure of negative gamma prevented a move higher, and since they couldn't rise, stocks sold off closing near session lows. 

Granted, there was the usual chaos in the last 30 minutes of trading, when a huge sell program was followed by an almost identical buy program...

... but it was too little too late to save stocks from another down day.

While the Russell, energy stocks and banks managed to bounce and drifted in the green for much of the day - perhaps as investors looked forward to good news from JPMorgan tomorrow when the largest US bank kicks off earnings season - the rest of the market did poorly with most other sectors in the red.

Earlier today we noted that the SPY remains anchored by two massive gamma levels, 430 on the downside and 440 on the upside...

... however that may soon change. As SoFi strategist Liz Young pointed out, "It's been 27 trading days since we hit a new high on the S&P 500. The last time we went this long was...exactly this time last year. New highs happened on Sept 2nd, both years, before a pause."

In rates we saw a sharp flattening with another harrowing CPI print on deck tomorrow which many expect to roundly beat expectations...

... with the short end rising by 3bps, a move that was aided by a poor 3Y auction which saw a slump in the bid to cover and a plunge in Indirect takedown, while the long end tightened notably, and 10Y yields on pace to close 4bps lower.

The dollar went nowhere, and while oil tried an early break out and Brent briefly topped $84, the resistance proved too much for now and the black gold settled down 31 cents for the day at 83.34 although WTI did close up 4 cents, and above $80 again, at $80.54 to be precise. Still, with commodity prices on a tear, it's just a matter of day before Brent's $86 high from October 2018 is taken out.

With stocks failing to make a new high in over a month, investor sentiment has predictably soured with AAII Bulls down to the second lowest of 2021, while Bearish sentiment continues to rise.

There is another reason sentiment has been in the doldrums: traders are concerned that price pressures and supply-chain snarls will drain corporate profits and growth, and expect disappointment from the coming earnings season which according to Wall Street banks will be a far more subdued affair compared to the euphoria observed in Q1 and Q2.  Quarterly guidance, which improved in the runup to the past four reporting periods, is now deteriorating, with analysts projecting profits at S&P 500 firms will climb just 28% Y/Y to $49 a share. That’s down from an eye-popping clip of 94% in the previous quarter.

Meanwhile, adding to the downbeat mood, Atlanta Fed President Raphael Bostic finally admitted that inflation is not transitory, and the Fed should proceed with a November taper amid growing fears that inflation expectations could get unanchored. Earlier in the day was saw that 3Y consumer inflation expectations hit a record high 4.3% confirming that the Fed is on the verge of losing control.

Vice Chair Richard Clarida agreed and said that conditions required to begin tapering the bond-buying program have “all but been met.”

Finally, the IMF delivered more bad news today when it cut its global GDP forecast while warning that inflation could spike, and cautioned about a risk of sudden and steep declines in global equity prices and home values if global central banks rapidly withdraw the support they’ve provided during the pandemic. In short, the world remains trapped in a fake market of the Fed's own creation.

Tyler Durden Tue, 10/12/2021 - 16:02
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Economics

Carbon prices are on the rise and businesses already decarbonising are ahead of the pack

Remember the carbon tax? Back in 2012 PM Julia Gillard got slammed for putting a price on carbon emissions, and … Read More
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Remember the carbon tax?

Back in 2012 PM Julia Gillard got slammed for putting a price on carbon emissions, and the heat is on current PM Scott Morrison with the issue set to be a hot topic at the Glasgow Climate Conference later this month.

Many governments around the world have either introduced an Emissions Trading Scheme (ETS) or imposed carbon taxes – because carbon pricing is one of the most effective ways of reducing greenhouse gas emission levels on the domestic and international level.

With ETS, governments set the quantity of emissions permitted and let the market find the market-clearing price.

For carbon taxes, governments impose a tax on emissions and then let the market find the market-clearing quantity of emissions.

According to CRU Group research analysts Clifton Hoong and Frank Eich, ETSs come out on top.

“When comparing their respective contributions in addressing greenhouse gas (GHG) emissions, ETS does come out top, covering 16.1% of global GHG emissions, almost three times the 5.5% that carbon taxes cover,” they said.

The UK and Europe have adopted emissions trading schemes and even China – the world’s largest carbon emitter – launched a nationwide ETS in July after experimenting with regional ETSs.

And in Singapore, a new global carbon exchange, Climate Impact X, is expected to launch by the end of the year.

Pic: Range of external carbon price forecasts (2020 prices $/ tCO2).

 

Carbon prices are set to rise

The analysts said that the sharp increase of the carbon price on the EU ETS over recent months gives an idea what might be in store in the years and decades ahead.

“In 2021, European carbon taxes averaged $42/tCO2, which is relatively cheaper compared with the $56/tCO2 average that has been traded in the EU ETS so far in 2021,” the analysts said.

“We have conducted a survey of recent carbon price forecasts published by international organisations, governments, think tanks and corporates to get a sense of where carbon prices are headed.

“The range of forecasts is huge, but we should not be surprised to see a global carbon price of around $100/tCO2 by 2030 and around $300/tCO2 by 2050 if the world gets serious about climate change mitigation.”

And as carbon prices keep rising, commodity markets across the value chain will need to adapt.

“In some markets, carbon prices have been rising rapidly over the recent past and are forecast to do so for years to come,” Hoong and Eich said.

“The commodities markets across the value chain will need to prepare for and adapt to these new prices.”
 

EU and UK carbon market outlook

The EU was first to launch a major ETS in 2005 and by making carbon permits an increasingly scarce ‘good’, the EU is raising the market-clearing carbon price.

“These measures appear to be delivering,” CRU said.

“Having in the past frequently been criticised for being too low to make a difference, the EU ETS carbon price has increased sharply since the beginning of the year, reaching a new record €65/tCO2 (i.e., $75/tCO2) on 26 September.”

And word on the street is that the UK Government might have to step in and intervene in its national carbon market in December if crises remain elevated through November, given the current energy crisis causing the prices to average £58.36 per metric tonne in September.

“Even small increases in energy or fuel costs frequently lead to protests or even social unrest,” Hoong and Eich said.

“How to sell the necessity of increasing the price of energy to the electorate in the name of climate change mitigation when increasing prices are deeply unpopular and – often – also considered to be socially unfair?

“The latest spike in European natural gas prices is a reminder of that.

“Finding a way through this conundrum will be one of the biggest challenges for policymakers in the years ahead.

“As the recent outcome of the Swiss referendum on tougher climate change legislation forcefully demonstrates, we should be ready for major setbacks on the way to net zero over coming years.”

EU carbon price
Pic: EU carbon price reaching €65 on 26 September.

 

Commodities markets will have to adapt

“Major setbacks are not the same as abandoning the ambition and the commodities markets – just like all other sectors of the global economy – will need to prepare for and adapt to higher carbon prices,” the analyst said.

“The likely dramatic increase in carbon prices in the future will have fundamental implications for many parts of the economy, more so for businesses in the carbon-intensive industries.”

But not all players will be affected equally.

“For those industries where switching electricity to a low-carbon alternative is a solution (e.g., mine sites, aluminium production), the transition could be ‘relatively’ simple and at lower cost,” Hoong and Eich said.

“By contrast, changing the way how a key raw material is produced (e.g., hydrogen for ammonia) will likely prove more challenging and, almost certainly, more costly.

“Where a wholesale shift in technology is needed (e.g., hydrogen steel production), the transition will potentially be painful.

“Even operations that are already low carbon as a result of access to low-carbon electricity (e.g., hydro feeding aluminium smelters) will see cost inflation as supply contracts are renegotiated in the context of rapidly rising electricity prices.”
 

Businesses already decarbonising will benefit

The analysts said that often implementing decarbonisation plans means a significant upfront investment in electrifying energy inputs, integrating renewables and reducing the carbon footprint.

That cost is a barrier to transformation for many businesses – but inaction isn’t the way to go,” Hoong and Eich said.

“Implementing these decarbonisation plans often incurs substantial upfront investment cost, which can act as a barrier to transformation.

“Up to now this made the alternative route of action – doing nothing – attractive to many.

“But as the opportunity cost of doing nothing increases as carbon prices go up, this alternative route will become increasingly unattractive.

“Those who have already placed their bets on hefty investments to decarbonise their production operations are starting to reap the benefits as the cost of carbon continues its way up.

“We should expect others to follow suit.”

The post Carbon prices are on the rise and businesses already decarbonising are ahead of the pack appeared first on Stockhead.

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