Batten down the hatches

Batten down the hatches, the storm is here.

Nymex WTI Light Crude futures (March 2016) are testing support at $30 per barrel. There is no indication that this is the bottom and breach of $30 would be likely to test $20 per barrel.

Nymex WTI Light Crude March 2016 Futures

* Target calculation: 30 – ( 40 – 30 ) = 20

Long-term interest rates are falling, with 10-year Treasury yields headed for another test of primary support at 1.5 percent. Breach of 1.7 percent would confirm. The flight from stocks is driving up Treasuries (and yields lower).

10-year Treasury Yields

Flight to safety is (normally) synonymous with a strong Dollar, so the weakening Dollar Index is a surprise.

Dollar Index

China must be selling off Dollar reserves to support the Yuan and restore confidence.


Too late, I’m afraid. That horse has bolted. Loss of confidence in the Yuan is driving demand for gold, with the spot metal rallying to $1200 per ounce. Resistance at the former support level makes retracement likely, but a trough that respects $1100 or narrow consolidation below $1200 would suggest reversal (to an up-trend). Breach of $1200 would offer a target of $1300*.

Spot Gold

* Target calculation: 1200 + ( 1200 – 1100 ) = 1300

After forming a lower peak at 18000, Dow Jones Industrial Average is testing primary support at 16000. 13-Week Twiggs Momentum peak at zero warns of a primary down-trend. Breach of support would offer a target of 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The S&P 500 displays a similar pattern, testing primary support at 1850, with a 13-week Twiggs Momentum peak at zero. Breach of support would offer a target of 1500*.

S&P 500 Index

* Target calculation: 1850 – ( 2150 – 1850 ) = 1550

A monthly chart shows VIX rising for another test of 30. Oscillation between 20 and 30 flags elevated market risk.

CBOE Volatility Index

Australia’s ASX 200 retreated below primary support at 5000, signaling a primary down-trend. A 13-week Twiggs peak below zero already warns of a decline. Today’s close at 4832 confirms, offering a short-term target of 4600* and a long-term target of 4000*.

ASX 200 Index

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

Investors who plan to hold stocks through a possible down-turn should stop watching daily prices and listening to news reports. It will only weaken your resolve. I am comfortable with holding stocks with strong dividend streams, but wary of holding growth stocks as they normally suffer the biggest losses.

For traders this is a time of dangerous opportunity. Either shorting sectors likely to be worst hit or waiting for opportunities to buy gold stocks.

Northern Star (NST)

Only when the tide goes out do you discover who’s been swimming naked.

~ Warren Buffett

Bears threaten US rally

Rallies on the Dow and S&P 500 reflect a more positive outlook for the US economy. But the FTSE 100 has followed China’s Shanghai Composite and India’s SENSEX into bear territory, while Germany’s DAX, Japan’s Nikkei 225 and Australia’s ASX 200 threaten key support levels. There is very little to cheer about at present.

Dow Jones Global Index is testing resistance at the former primary support level of 290. Respect is likely and breach of 270 would confirm another decline. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Dow Jones Industrial Average recovered above primary support at 16000 but respect of 17000 is likely and would warn of another decline. Breach of 16000 offers a target of 14000*. 13-Week Twiggs Money Flow oscillating around zero indicates uncertainty.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The S&P 500 recovered above 1900, while rising 21-day Twiggs Money Flow indicates short-/medium-term buying pressure. Expect a test of 2000 but breakout is unlikely. Breach of support at 1900 would signal another decline, with a (medium-term) target of 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) continues to range between 20 and 30 reflecting hesitancy — and the potential to react quickly to bad news.

S&P 500 VIX

Canada’s TSX 60 also retraced to test resistance at 750. Respect is likely and breach of 700 would offer a target of 650*. Declining 13-week Twiggs Momentum peaks below zero indicate a strong primary down-trend.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650


Germany’s DAX is testing primary support at 9500. Peaks below zero on 13-week Twiggs Momentum warn of a primary down-trend. Follow-through below 9300 would confirm.


* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

The Footsie retreated below 6000, signaling a primary down-trend. 13-Week Twiggs Momentum peaks below zero further strengthen the signal. Long-term target for a decline is 5000*.

FTSE 100

* Target calculation: 6000 – ( 7000 – 6000 ) = 5000


Support has given way on the Shanghai Composite Index, strengthening the primary down-trend signaled last August when 13-week Twiggs Momentum crossed below zero. Target for the decline is 2400*.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is testing primary support at 17000. Breach is likely and would confirm the primary down-trend signaled by 13-week Twiggs Momentum below zero.

Nikkei 225 Index

* Target calculation: 94 – ( 106 – 94 ) = 82

Two failed swings on India’s Sensex (failing to reach the upper trend channel) warn of increasing selling pressure. Declining 13-week Twiggs Momentum peaks below zero confirm this. Follow-through below 24000 would offer a target of 22500*.


* Target calculation: 25000 – ( 27500 – 25000 ) = 22500


The ASX 200 staged a short rally today but sentiment remains bearish and respect of the recent high at 5050 would warn of another decline. Bullish divergence on 21-day Twiggs Money Flow indicates medium-term buying pressure but the weight of global bear markets is likely to sap any enthusiasm. Reversal below 4850 would offer a medium-term target of 4650*, or 4000* in the long-term.

ASX 200

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

The largest sector, Banks, is already in a primary down-trend, having been singled out for particular attention by the bears. Breach of support at 7500/7600 would warn of a decline to 6600*.

ASX 300 Banks

* Target calculation: 7600 – ( 8600 – 7600 ) = 6600

Markets are fundamentally volatile. No way around it. Your problem is not in the math. There is no math to get you out of having to experience uncertainty.

~ Ed Seykota

China’s commodity demand has barely begun its fall – MacroBusiness

These four charts, posted from Investing in Chinese Stocks by David Llewellyn-Smith, illustrate China’s failure to rebalance their economy and the challenge that economies reliant on Chinese real estate and infrastructure investment, like Australia, face.

….China now accounts for fully a third of global industrial production (up from only 5% as recently as the 1990s)–see Exhibit 5.

When you are that big, it becomes increasingly difficult to grow exports and production at a pace materially faster than growth in final global demand, which has averaged about 3% for the past few decades.In addition, since the Great Recession, the relationship between global trade and output (GDP or IP) seems to have changed, with trade no longer growing faster than the overall global economy (Exhibit 6).

For those economies where growth models have tended to be focused on external support like China, this change has introduced substantial new challenges as they try to overhaul their growth models.These structural factors, along with the fact that external demand has remained mediocre since the crisis, has meant that China is attempting to “rebalance” its economy against a backdrop of dramatically weaker export growth, as evidenced in Exhibit 7.

Finally, after a period of “rebalancing” away from investment toward consumption in the mid-2000s, the Great Recession was a tremendous setback to the ultimate objective of more balanced growth. Indeed, the main policy mechanism for fighting the slowdown in 2008 and 2009 was a massive increase in investment, which we now know occurred at just the time that the export-driven growth model was breaking down. Unfortunately, despite the substantial growth slowdown of recent years, there is little evidence that investment as a share of GDP has fallen substantially from the post-stimulus highs. Indeed, at least through to 2014–the latest comparable data available–all that has happened is that the investment share has stopped going up (Exhibit 8).

Source: China’s commodity demand has barely begun its fall – MacroBusiness

PBOC hits impossible trinity brick wall – MacroBusiness

From David Llewellyn-Smith:

….China is up against the “impossible trinity” here, that a country cannot control floating interest rates, the currency and capital flows all at once.

Like its ad hoc capital controls, I expect that liquidity injections will prove inadequate after a while and the PBOC will be forced to ease again. And if it has any brains it’ll know that. This is about spreading the pain over a manageable period of time – the glide slope as I call it – not preventing the adjustment from happening. The alternative of no easing and a supported yuan will simply bring on the hard landing all the quicker.

It’s called the impossible trinity for a reason.

It really comes down to common sense: there are no free lunches. One of the most frequently overlooked rules in macroeconomics.

Source: PBOC hits impossible trinity brick wall – MacroBusiness

Electricity production falling

In November I observed that US electricity production had remained stagnant since 2008. Basically, manufacturing had stalled. The December 2015 decline to 95 shows a far more worrying event: manufacturing is now shrinking.

Electricity Production Index

Decline of the ISM Manufacturing PMI Composite Index below 50 tends to bear this out. But a secular decline would be far more serious than your common-or-garden-variety cyclical contraction.

ISM Manufacturing: PMI Composite Index

Dow breaks support

My newsletters on December 10th and January 14th warned of the approaching storm across global markets. The Dow Jones Industrial Average has now broken primary support at 16000, signaling a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero, indicating selling pressure, strengthens the warning. Target for the decline is 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

S&P 500 breach of primary support at 1870 confirms the Dow signal. The long tail on the latest candle indicates the continued presence of buyers (highlighted by rising 21-day Twiggs Money Flow). Expect retracement to test the new resistance level but respect is likely and follow-through below 1850 would be the final nail in the coffin. The medium-term target is 1700* but long-term, expect a test of 1500.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) testing 30 suggests elevated risk.

S&P 500 VIX

Gold and Treasury Yields

Bonds have benefited from the flight to safety, with 10-year Treasury Yields closing below 2.0%. Follow-through below 1.90% would suggest a test of the 2015 low at 1.65%.

10-Year Treasury Yields

Gold likewise rallied to $1100 per ounce. But falling oil prices and low inflation are likely to undermine any long-term demand for gold as a store of value.

S&P 500 VIX

How far will the S&P 500 fall?

Prompted by a question from Hailoh on IC forum:

“Down for sure, but in what stages? Without a Lehman failure there may not be the impetus for a dramatic plunge towards the end.”

The S&P 500 is testing primary support at 1850/1870. Decline of 6-month Twiggs Momentum below zero warns of a primary down-trend. I am a great believer in chart symmetry and breach of 1870 would most likely result in a decline to 1500, the next major support level.

S&P 500 Index

This could still prove to be a false alarm — as in 1998, 2010 and 2011 — but charts like bellwether transport stock Fedex suggest otherwise.


Also the 10% year-on-year declining profit margins for Q3 2015. A 20% year-on-year fall for Q4 2015 would confirm.

Profit Margins

Fedex warns of slowing economy

Bellwether transport stock Fedex, in a primary down-trend, warns of slowing economic activity in the US. The 6-month Twiggs Momentum peak below zero flags a strong down-trend. Breach of support at 130.00 would warn of another decline — and worsening economic climate.


European equivalent Deutsche Post AG (DPW.DE), owner of DHL, also warns of declining economic activity. Breach of support at 23.00 would warn of another decline.

Deutsche Post AG

ASX wagon follows China engine

The ASX wagon is clearly hitched to the Chinese growth engine. When China slows and commodity prices fall, the ASX is sure to follow.

The Shanghai Composite Index is simply a barometer of the main show, which is Chinese real estate and infrastructure investment. Chinese stocks are again falling, with the index headed for a test of primary support at 3000. Rate rises in the US are likely to increase capital outflows from China. The PBOC’s massive foreign currency reserves act as a buffer but have already been depleted by half a trillion Dollars. Loosening the peg against the Dollar may soften the immediate impact on reserves. But a falling Yuan is likely to further encourage capital outflows.

Shanghai Composite Index

The ASX 200 broke primary support at 5000. Reversal of 6-month Twiggs Momentum below zero signals a primary down-trend. Follow through below 4900 would confirm the decline, with long-term support at 4000*.

ASX 200

* Target calculation: 5000 – ( 6000 – 5000 ) = 4000

How long will the oil-price shock last?

From Marek Dabrowski at Bruegel:

……the depth of the oil-price shock looks comparable with that of the second half of 2008 and early 2009. However, while the 2008-2009 shock resulted from a temporary liquidity crisis caused by the Lehman Brothers bankruptcy, the current shock seems to be underpinned by more fundamental demand- and supply-side factors.

On the demand side, there are the observed slowdowns of emerging-market economies, effects of energy-saving policies in developed and developing countries, and the gradual tightening of US monetary policy, which reduced the appetite for speculative purchases of oil and other commodities. In speaking about the demand side, we mean massive investment in new oil-production capacities, including shale oil, in the last two decades (Dale, 2015), the declining market power of the OPEC cartel and development of alternative energy sources.

Consequently, the lower level of oil prices could reflect a new market equilibrium and could last longer than the short-term price declines of 1998-1999 and 2008-2009. The current situation is more reminiscent of the dramatic oil price adjustment observed in the mid-1980s, after which low prices dominated for more than a decade. If this scenario is repeated now, all net oil exporters will face inevitable challenges of both macro- and microeconomic adjustment in the long term.

…..Overall, countries that conducted prudent macroeconomic policies and built-up large fiscal buffers in boom years (Gulf countries, Norway, Brunei Darussalam) have had more room to manoeuvre in choosing the right policy response to the price shock, compared to those that had smaller or no reserves. In particular, they could employ countercyclical fiscal policy to mitigate the effect of lower prices (see above).

I am sure most Australians can relate to this conclusion.

Source: The impact of the oil-price shock on net oil exporters | Bruegel

Infantilism as Russia’s Official Ideology | Free Russia Foundation

From Russian independent journalist Arkady Babchenko:

If you asked me to characterise the “Russian World” (Russky mir) in one word, I would not hesitate to call it infantilism. This term best describes the current state of Russian society.

Infantilism is, first and foremost, the inability to take responsibility for one’s own actions; the inability to draw causal links and to understand that such-and-such actions lead to such-and-such consequences.

……The absolute lack of understanding of the value of life is just as infantile.

It is not acceptable for adults to inflate a frog with a straw, to decapitate a puppy, to pound residential neighbourhoods with weapons of indiscriminate destruction, or to shoot down passenger jets with surface-to-air missiles…..

……All I can say is that we can confirm that the experiment of dumbing down a whole nation has been brought to a successful completion.

Read more at Infantilism as Russia’s Official Ideology | Free Russia Foundation

Russia’s unsustainable budget deficit

Interesting comment on Russia’s 3% budget deficit from Sergei Guriev, professor of economics at Sciences Po in Paris:

The 3 percent GDP deficit is not large but because Russia lacks access to financial markets, it can rely only on its Reserve Fund. Given that the Reserve Fund accounts for only 6.7 percent of GDP, it is not surprising that the government stopped drafting three-year budgets.

Read more at Deglobalizing Russia – Carnegie Moscow Center – Carnegie Endowment for International Peace

Productivity increases: Due to hard work or better tools?

From Ambrose Evans-Pritchard:

Prof Stiglitz, a former chief economist for the World Bank and winner of the [Nobel] Prize in 2001, said real median pay for full-time male workers has fallen back to levels last seen 40 years ago, yet productivity has risen 100pc over the same period.

The workers have been excluded from all the gains, or as he puts it, we now live in an “inherited plutocracy” where the rich accumulate ever more in a perverse dynamic that will not necessarily self-correct.

This argument by Prof Stiglitz is simplistic. Productivity may have doubled over the last 4 decades, but this is primarily due to tools at the disposal of the worker today and not because people are working harder. Real annual investment per employee has also doubled over the last 40 years.

Gross Domestic Investment per Employee

A counter argument would be that workers today may be better trained/educated in order to operate all that expensive equipment. The truth probably lies somewhere in between.

Source: Nobel gurus fear globalisation is going horribly wrong (technical) – Telegraph Blogs

Putin’s popularity, explained

From Matthew Dal Santo at The Interpreter:

The main point is, however, that Russia’s ‘conservative turn’ since Putin’s return to the Kremlin in March 2012 — widely deplored in the West as a creeping authoritarianism with roots only in the wiles of Putin’s mind — may be closer to the world view of Russia’s conservative and patriotic majority than most Western governments would care to admit……

To Dmitri Trenin, director of the Carnegie Moscow Centre, however, this is betting on the wrong horse. ‘This isn’t just about Putin’, he told a group I was with in Moscow. ‘It’s about the nature of society as a whole. Putin has been able to rule this country in an authoritarian way with the consent of the governed.’ The imagined liberal majority looking to the West for emancipation doesn’t exist. Russian liberals, he said, ‘have the same problem the revolutionaries have always had in Russia: they look down on the rest of the country as dupes.

‘But Trenin is just as pessimistic about the ability of Russia’s present rulers to address the country’s underlying problems. ‘We will have to expect some sort of upheaval. The dams will have to be broken somehow.’

Read more at Putin’s popularity, explained

The Year Of The Troll

From Brian Whitmore at RFE/RL:

“To think of Russia as a troll state is not to assume that it has no real goals or that its targets are chosen purely on a whim. It does, however, help to explain a style of statecraft that might otherwise seem increasingly irrational and unpredictable,” [Kremlin-watcher Andrew Kornbluth at Atlantic Council] wrote.

Indeed, Russia’s trolling is part of an ongoing effort to eat away bit by bit at Western resolve, European and transatlantic unity, and the post-Cold War international order. And the unpredictability of Moscow’s global trolling also serves to keep everybody off balance.

…..But trolling — like terrorism — is a weapon of the weak. “By tormenting others, trolls create the illusion of action and assuage their own nagging feelings of powerlessness,” Kornbluth wrote.

Back in February on the sidelines of the Minsk peace talks, a live microphone picked up a conversation between Ukrainian President Petro Poroshenko and Belarusian strongman Alyaksandr Lukashenka. The subject was Kremlin leader Vladimir Putin. “He’s playing a dishonest and dirty game,” Poroshenko said.

Lukashenka nodded sympathetically, replying: “I know, I know. Everybody realizes this.

“Everybody realizes it indeed. And the game continued all year.

Source: The Year Of The Troll

A Strong Dollar Hurts China Most | Bloomberg Business

From Rich Miller and Enda Curran at Bloomberg:

The yuan has advanced almost 15 percent against a basket of currencies since mid-2014, according to a trade-weighted index compiled by Westpac Strategy Group in Sydney. The rise came at a time when China was already losing competitiveness to countries such as Vietnam and Thailand because of its higher labor costs.

….The result of the currency’s recent rise has been slower economic growth. GDP expanded 6.9 percent in the third quarter from a year earlier, its worst performance since early 2009, as the drag from weaker manufacturing and exports offset strength in services and consumption.

A stronger currency also hampers China’s efforts to ward off deflation because it puts downward pressure on import prices…… “China will continue to face deflationary pressure, particularly in its manufacturing sector” if the yuan continues to appreciate along with the dollar, Xiao Geng, a professor at the University of Hong Kong, said in an e-mail. He nevertheless expects China will avoid depreciating its currency on concern that such a move would upset fragile domestic financial markets.

Another reason to hold the yuan steady against the greenback: a build-up in dollar-denominated debt by Chinese companies. A cheaper yuan makes it tougher for them to service those obligations.If China does elect to retain its currency regime, it must be prepared for a further broad rise of the yuan in line with the dollar.

China appears locked in to its peg against the Dollar but a strong Dollar/Yuan hurts exports. So it looks like the PBOC has opted to sell down foreign currency reserves in order to slow appreciation of the Dollar, while maintaining the peg. But reserves have already fallen by half a trillion Dollars and the outflow is likely to accelerate when the Fed raises interest rates. They are in for a wild ride.

Source: A Strong Dollar Hurts China More Than the U.S. – Bloomberg Business

Australian Chamber–Westpac Survey of Industrial Trends

Andrew Hanlan

From Andrew Hanlan at Westpac:

The Westpac-AusChamber Actual Composite index moderated in the December quarter to 53.5, down 3.2pts, from 56.7 in September. This is a still solid reading, above the historic average of 49 and up from an average of 52.4 for 2014.

The trend strengthening of the Composite index in 2015 has been centred on new orders, output and overtime, with some moderation in new orders and output in the final months of the year.

Manufacturing is benefitting from a strong upswing in new home building activity, as well as the lift in renovation activity and from the significant improvement in competitiveness flowing from the sharply lower currency, down 25% against the US dollar from mid-2014. However, the cycle remains constrained. Consumer spending is below trend, mining investment is turning down sharply and global fragilities persist.

Exports are rising modestly, supported by the lower currency but constrained by still sluggish world growth. A net 3% of firms reported a lift in exports.

The manufacturing sector has been decimated by the strong Dollar during the mining boom. Now mining investment is falling. Manufacturing will take many years to recover and it is important to maintain strong infrastructure spending to fill the hole.

Source: WIB IQ – world-class thinking in real time.

Most violence in the world is motivated by personal morality – Quartz

From Tage Rai, Lecturer at MIT Sloan School of Management:

What motivates someone to be violent? This is a question many people are asking in the wake of the recent mass shootings in California. Most explanations tend to revolve around the core assumption that violence is wrong. If someone is violent, something must be broken in their moral psychology—they are intrinsically evil, they lack self-control, they are selfish, or they fail to understand the pain they cause. However, it turns out that this fundamental assumption is mistaken…….

I looked at violence across cultures and history with my colleague Alan Fiske of the University of California, Los Angeles. We analyzed records of all kinds of violence, ranging from war to torture to genocide to homicide. While this was rather depressing work, it also led to some very interesting findings. We identified a pattern in that violence that was both predictive and explanatory. The commonality was that the primary motivations were moral. This means that the perpetrators of violence felt like what they are doing was morally right. In fact, when they were committing the act, they perceived that not acting would be morally wrong…..

Read more at Most violence in the world is motivated by personal morality – Quartz