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Trading Blog - Trader's Narrative


They say absence makes the heart grow fonder... or as an economist might say, restrict the supply and demand will grow fonder.

As you've no doubt noticed Trader's Narrative is going through some technical difficulties at the moment. Thank you to all who contacted me with suggestions, advice, and words of support. I'm grateful to my readers, as always.

For the past few weeks I've been furiously working behind the scene trying to get my wordpress install and MySQL back on its wobbly legs but for the moment, I've given in and found a temporary home here.

I'll be posting there until all is well again with a fresh install of wordpress and a new template. When things are all worked out, the content at my temporary home will then be removed and put back on this site - where it belongs. I'll do my best to also move comments, trackbacks, etc.

So if you've missed me as I've missed my audience and the process of analyzing and writing about the markets, join me over at my temporary home.

In the following days I'll be re-publishing the posts that I was unable to publish here for the past few weeks. These posts will be slightly dated but hopefully they will be somewhat insightful. At the same time, I'll do my best to keep up with the flow of daily posting as usual.

In the meantime, I would appreciate your patience and indulgence. As well, if you have any suggestions for the new site, I'd love to hear them. I'm working on a redesign or Trader's Narrative 2.0 (joking).

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During last week's sentiment overview we went over several indicators which suggested that we are at another cusp of optimism.

The NDR Crowd Sentiment poll is another important indicator which is confirming that market condition. Unlike the AAII or the Investors Intelligence surveys, the Crowd Sentiment poll from NDR is an amalgamation of several such sentiment indicators. The actual variables and formula is proprietary but the advantage it offers is that with one single indicator we can keep tabs on the whole sentiment landscape before us. There are other such aggregate sentiment indicators of course, such as TrimTabs Demand Index or SentimenTrader's "Dumb Money/Smart Money Confidence". But for now, let's take a look at NDR's Crowd Sentiment poll.

Click chart to see larger version in a new tab:
NDR Crowd Sentiment Poll 2 Nov 2010
Source: Ned Davis Research

NDR considers any readings above 61.5% to be "Extremely Bullish". So the current level of 69% qualifies as such. The last time the Crowd Sentiment poll was at similar levels was in April 2010 when it peaked at a high of 70.7%. That of course, corresponded with the intermediate market top.

The history of this indicator suggests that the S&P 500 index will have trouble going forward. According to NDR, when the Crowd Sentiment is above 61.5%, the S&P 500 index returns an average of -0.7% annually. When it is in neutral (between 55.5% and 61.5%) equities gain 5.1% annually and when it is below 55.5 they gain almost double, 9.5% per annum.

As Tim Hayes recently mentioned in an interview with Bloomberg, NDR continues to be bullish on the overall trend of the market and believes that the bull is still in effect. But they have been telling clients to expect a correction, no doubt based on this extreme reading from the Crowd Sentiment poll.

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Morning Notes For November 16th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author's comments are in italics. I welcome your feedback in the comments:

  • Retail sales rose 1.2% in October, a surprisingly strong result well in excess of the consensus 0.7% forecast. Consumer spending has surprised to the high side for three consecutive months Consumer spending will be revised up a tenth or two in the third quarter and is on course to be better in the fourth quarter.

    The pick-up in consumption is not enough to materially change the economic outlook; the economy is still growing too slowly to make a dent in the unemployment rate. But it is enough to keep the expansion alive despite an impending slowdown in inventory investment. – FTN Financial – somehow the chart below is making new all time highs. Other retail sales measures (total retail sales, total less food, total less autos, etc.) are close to previous highs, but not making new highs.

Total Retail Sales Less Autos and Gas Stations
total retail sales less autos and gas stations Nov 2010

  • Banks may agree to a settlement of the foreclosure issue worth ~$1 billion in the next month – Fox
  • California saw "decent demand" (but not overwhelming demand) on Monday as the state started to market a $10B municipal bond deal (the state sold about 44% of the $10 billion to retail investors in its first day). The real test will come though when CA tries to sell $2 billion worth of longer-term BABs. California will be selling ~$14 billion in total over the next two weeks. WSJ/FT – a lot of muni debt will hit the market before year end
  • Because of the nature of American business today, a weaker US dollar may not do much for exports and therefore may not stimulate the US economy all that much – NYT
  • Fed's dual mandate under attack – Mike Pence, chairman of the House Republican Conf, on Mon said he planned to introduce a bill that would end the Fed's dual mandate on unemployment and inflation and force it to concentrate solely on prices – FT – this is essentially how the ECB operates.
  • Treasury 30-year bond yields rose to the highest level since May as a report showed retail sales increased, a group urged the Federal Reserve to halt purchases of bonds because it may risk a surge in inflation, and Moody's critiqued a presidential commission's deficit-reduction plan. – Bloomberg

30 Year Treasury yields
30 year US treasury bond yields Nov 2010

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Is It All Over For Gold?

Last week everyone was cheering as gold and other commodity markets were making new highs. This week however, things have changed as everyone seemed to want to jump through the same door, at the same time, putting a great deal of downside pressure on many markets.

This phenomenon sometimes happens when people have multiple positions in multiple markets in the same direction. When they start to take profits, there is no one left to buy.

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Morning Notes For November 15th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author's comments are in italics. I welcome your feedback in the comments:

  • Gary Shilling, who predicted the U.S. housing collapse, says the stock market is overvalued and foresees a "significant" selloff within a year. – Bloomberg
  • Richmond Fed President Jeffrey Lacker said the central bank may soon need to tighten policy even amid a high U.S. unemployment rate to avert a rise in prices similar to the 1970s. – Bloomberg
  • The US should curb the Fed's power over the money supply and return to the gold standard, James Grant, publisher of Grant's Interest Rate Observer, wrote in a NYT opinion piece. – Bloomberg
  • The benefits of open trade generally outweigh the costs, according to a report from the OECD, the International Labor Organization,the World Bank and the World Trade Organization presented at the G-20 summit. The report recommends that to sustain support for open markets, the costs must be recognized, "and policies put in place to assist workers and communities to adjust to a more competitive environment." – OECD – Organization for Economic Cooperation & Development
  • US homebuyers can borrow more cheaply than the government for the first time. – Bloomberg

30 Year Mortgage Rate vs. 30 Year Treasury Yield
30 year mortgage rates Treasury yield Nov 2010

This is because the ten year treasury yields are usually the benchmark for 30 year mortgage rates (not 30 year treasury yields). In QE2, the Fed is targeting ten year treasury rates more than 30 year. Thus, by holding down ten year treasury yields, the fed is effectively holding down 30 year mortgage rates.

  • Dollar strong/Treasury weakness – the "anti-QE2" trade continues – some catalysts: 1) continued pressure applied on the Fed re its asset purchase program (see this morning's WSJ), prompting speculation Bernanke may not follow through w/the full authorization; 2) policy gap between Fed and ECB seen as narrowing (with talk of Ireland assistance); 3) growth gap between US and ECB seen widening in US favor (following the sluggish Eurozone GDP numbers released on Friday). – JPM
  • Municipal debt markets received a lot of attention after their drubbing last week (the WSJ and NYT both had features discussing the sell-off in the muni market; note that there are ~2.5x the amount of muni sales scheduled for this week vs. last). – JPM

Yields on AAA 10 year Munis
10 year AAA muni rate Nov 2010

  • "We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment" – WSJ
  • WSJ economics survey – economists don't expect there to be a QE3. Most see growth of 2.4% in Q4 and 2.6% in the first half of 2011. Growth is seen accelerating slightly to 3% in the second half of next year. – WSJ
  • Greenspan on Meet The Press warned about a potential crisis in the Treasury markets unless action is taken to cut the US budget deficit – Reuters
  • Cigarette companies are ramping up efforts around the globe to combat new efforts on the part of emerging market (EM) governments to restrict the sales of tobacco products. Cigarette companies view emerging markets as critical growth opportunities as smoking rates in the US and Europe decline. – NYT
  • Scientists now think sea levels could rise ~3 feet this century while other are fearful of a rise of as much as 6 feet; the former number would pose serious risks to coastal regions around the world, w/flooding becoming much more frequent, while the latter would jeopardize some of the world's great cities – NYTgo see Venice while you can.
  • Currency wars hit the Youtube mainstream in a U.S.-China rap battle animation that had more than 150,000 viewers as of Sunday. "They're not enemies, but frenemies, with co-dependent economies," according to the chorus. – Bloomberg/Youtube
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