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The following (green highlights) is a brief excerpt and one of 23 charts from this month’s Global Seasonal Analysis report.
Global Seasonal Analysis, one of 8 reports that we produce for subscribers throughout the month, displays and analyzes annual, quarterly and monthly seasonal trends for 17 global asset prices including equities, benchmark interest rates, foreign exchange, and key commodity prices based on historical data going back to the 1950s.
Excerpt From: Global Seasonal Analysis
Asset Class: Gold
Topic/Title: Gold Monthly Seasonal Pattern Since 1977
Date: March 4th 2014
The green bar on the chart below identifies March as the seasonally weakest month of the year for gold prices (London PM fixing) since 1977. It represents a significant one-month decline from February, the 7th strongest month, and is the second of a 5 month period of seasonal weakness in gold prices that runs through June and includes 5 of the 6 weakest months of the year.
The depth of the teal bar on the chart indicates that, on average since 1977, gold prices have declined by 1.04% in March. The red line shows that, also on average since 1977, gold prices have posted a negative monthly close in March 57% of the time, which is its second highest incidence of a negative monthly close (after October) during this period.
At first glance, the chart above looks like a major red flag for gold investors. However, keep in mind that gold prices have already risen by $174 per ounce or 15% since the beginning of the year and are probably due for a correction.
We began getting long term bullish on gold prices back in July 2013 due to a very unusual unhedged condition by gold producers that we noticed back then, just as gold had ticked down to $1180 per ounce. We talked about it in our July 23rd Research Excerpt entitled Gold Prices Test Their First Upside Obstacle: Watch The Smart Money.
Gold prices subsequently exploded 22% higher to $1434 by the end of August before collapsing back to the $1180 area again by year end — just as the gold producers reverted back to their July unhedged position in the futures market. This series of events made it pretty clear to us that the smart money not only identified $1200 area as a value area for gold, but were willing to stake lifting the hedges on their physical holdings of gold on it.
We most recently updated our outlook on gold prices in our February 24th Commentary entitled The 2014 Gold Rally: The Real Deal, Or A Flash In The Pan? Non-subscribers can view a Research Excerpt of that report by clicking the title.
So, understanding how the smart money is positioned in the market, as we head into what has historically been the weakest month of the year for gold prices, can go a long way in identifying whether this is where gold bulls should cash in their chips, or consider using whatever weakness this month as an opportunity to add to an already profitable position.
Asbury Research subscribers can view our latest analysis of the gold market, and its expected effect on other financial asset prices, by visiting our Research Center.
The following (green highlights) is an excerpt and 2 of 10 charts from our February 21st Commentary, entitled The 2014 Gold Rally: The Real Deal, Or A Flash In The Pan?
Our Commentaries, 1 of 8 different reports that we produce for subscribers, are strategic in nature and provide a comprehensive analysis of specific areas of the US financial landscape looking one to several quarters out. Our Commentaries identify emerging intermediate term investment opportunities in specific financial assets, often before the actual new price trends become apparent.
Excerpt From: Market Commentary
Asset Class: Gold, US Interest Rates, US Equities
Topic/Title: The 2014 Gold Rally: The Real Deal, Or A Flash In The Pan?
Date: February 21st 2014
Gold prices first found their way onto our radar screen back in July 2013 because of some unusual investor positioning data from the Commodity Futures Trading Commission (CFTC), which we first displayed and discussed in our July 23rd report entitled Gold Prices Test Their First Upside Obstacle: Watch The Smart Money.
These data showed that in late June/early July gold producers collectively moved to an essentially unhedged position the futures market for the first time in more than a decade. This rare, unusual positioning indicated that the smart money was collectively convinced that gold was undervalued at $1200 per ounce. Unbeknownst to us at the time was that gold prices actually bottomed for the year just a few weeks earlier, at $1180 on June 28th. Prices then proceeded to spike higher to $1419 by the end of August, a $239 per ounce or 20% advance in less than 2 months. However, prices then subsequently collapsed right back down to $1180 by the end of the year, convincing many investors that this was just a bounce in a bear market, and that the larger 2011 bear market had resumed.
Then something interesting happened at the end of the year: the gold producers moved right back to that unhedged status in the futures market, just as gold prices dipped below $1200 an ounce. This further identified the $1200 area (at least to us) as a value area by the smart money. So far in 2014 gold prices have again aggressively rebounded, rising by $151 per ounce or 13% just since the beginning of the year.
In today’s report, we display and discuss a number of different market metrics including investor asset flows, investor sentiment, relative performance, price and trend structure, and intermarket relationships in an effort to answer the following questions:
- Is the 2014 rebound in gold prices just another correction with the 2011 bear market, or is this a sustainable new bullish trend?
- How much higher can gold prices realistically go? Where are the next upside targets?
- How long can the 2014 price advance potentially last?
- What’s the better place to be for bullish investors: outright gold or gold miners?
- How is a sustained rise in gold likely to indirectly affect the prices of other US financial assets?
Investor Asset Flows
The red line in the upper panel of Chart 1 below displays the data series that first shifted our focus to gold prices back in July 2013, the Commercial Hedger category of the Commitments of Traders data. Once per week the CFTC breaks down futures open interest into three categories, Commercial Hedgers, Large Speculators, and Small Speculators, and makes the data available to the public via their website.
As the name suggests, Commercial Hedgers use the futures market to hedge the value of their physical holdings in a commodity, and thus they atypically accumulate a net position against the trend.
One of the first things that you notice when you look at this chart is that the hedgers are almost always net short, because they are holding the physical asset. The green vertical highlights between both panels show that least net short (least hedged) extremes in December 2001, February 2005, and November 2008 all coincided with important intermediate to long term bottoms in the price of the gold contract (lower panel). The most recent of these extremes took place in July and December 2013, just as gold prices moved below $1200 per ounce, which identifies this as a value area for the smart money.
Since December, the hedgers have become collectively a bit more net short, at 72,654 contracts as of the latest data. However, this still qualifies as an historic least hedged extreme that, assuming history repeats, suggests that significantly higher gold prices are in store over the next one to several quarters.
Chart 2 takes a more near term look at investor asset flows via the daily total assets invested in the SPDR Gold Trust ETF (GLD), which is plotted along with its 21-day (1 month, red line) moving average in the upper panel.
The green highlights point out that expanding total daily assets during August 2013 and most recently since January 17th, above their 1 month moving average, coincided with the two most significant periods of rising gold prices since July 2013. This chart tells us that, in addition to the smart money establishing value near $1200 over the past 9 months, enough investor assets are now moving into gold on a day-to-day basis to establish and fuel a positive price trend. As long as these assets remain above their moving average, we will expect the current 2014 price advance to continue.
Chart 3 below measures investor sentiment according to a daily survey of near to intermediate term oriented individual futures trader bullishness on gold prices, which is plotted by the blue line in the lower panel.
Asbury Research subscribers can view the entire report by Clicking Here.
The following (green highlights) is one of 12 charts and accompanying analysis/commentary that were featured in Tuesday’s (February 18th) Keys To This Week report.
Keys To This Week is a bullet-pointed list of key market metrics, data series, and corresponding charts pertaining to the US stock market and market sectors, US interest rates, the US Dollar, and economically-influential commodities that we believe are the most potentially influential to upcoming US financial market direction over the next one to several weeks, and includes our broader market forecast 1-2 quarters out.
We utilize a comprehensive list of market metrics including intermarket relationships, investor sentiment, seasonality, relative performance, investor asset flows, market breadth, and price patterns and trends to formulate an “under-the-hood” analysis and forecast of the US financial landscape that tends to be more forward-looking than the typical Wall Street approach.
Excerpt From: Keys To This Week
Asset Class: The US Stock Market
Topic: Market Breadth in the Russell 2000
Date: February 18th 2014
Chart 6 below plots the small cap Russell 2000 daily since 2012 in the upper panel, with the percentage of the index’s constituent stocks trading above their 200-day moving average plotted by the blue line in the lower panel.
The bent green arrow in the lower right edge of the chart shows that this metric has been rising from an historic low extreme of around 20% since February 4th. The green vertical highlights between both panels show that previous instances of this have coincided with every significant near term bottom in RUT during this period. A near term rise in RUT would be expected to lead a similar rebound in the US broad market.
The small cap Russel 2000 led the S&P 500 higher between mid April 2013 and January 22nd, outperforming the US broad market index by 10% during this period. The major topic being discussed right now is whether the US broad market can continue grinding higher in the 1st Quarter, on the heels of a 30% advance in 2013 and amid record cold weather- and Fed tapering-related headwinds.
Relative performance is one way to determine if the 2013 uptrend still has legs — simply put, if the leaders that got us here can still lead. The chart above tells us that, at least from a market breadth standpoint, this is where small cap should start to lead again. If it doesn’t, the market is going to have problems.
Asbury Research subscribers can view our entire February 18th Keys To This Week report by Clicking Here.
We begin our analysis of sector-related asset flows with a pie chart (below), our own metric that determines what percentage of the sector pie each sector currently comprises.
We then compare that chart with one that shows the daily historic average composition of the “pie” (not shown) based on these data. This comparison reveals which sectors are currently at over-invested or under-invested extremes versus their historic norms. Moreover, these extremes define potential opportunities to underweight or overweight particular sectors, in anticipation of them eventually migrating back to their historic norms within the “pie”.
One important distinction to make pertaining to our metrics described here today is that they are based on a “zero sum game” within a defined pool of sector bet-related assets. This means that, for example, if Technology comprises 20% of the sector pie this week, up from 18% last week, that additional 2% is coming out of one or more other sectors.
At the beginning of the year we introduced a new, proprietary indicator based on these asset flow data, a line chart that plots the day-to-day percentage of the sector pie that each particular sector comprises. This indicator, as plotted by the black line in the lower panel of the chart below, confirmed our suspicions that, in the vast majority of cases, a growing “slice” of the sector pie will coincide with relative sector outperformance as investor assets leave other sectors to participate in that particular sector.
Beginning this week, we are introducing another way to view these sector-related asset flow data, a table (below) that displays what percentage of the sector pie that each sector has comprised at various time intervals over the past three months.
Note that the “Now” column is color-coded, to highlight the two sectors with the greatest inflows (green, based on the percentage change) and outflows (red) from a week earlier.
This past week, the two sectors with the biggest inflows were, in order, Materials (6.45% of the sector pie from 6.17% last week) and Health Care (11.91% from 11.67%). The two sectors with the biggest outflows were Technology (17.86% from 18.02%) and Consumer Staples (6.87% from 7.08%).
Look for this new table in our weekly Keys To This Week report, our monthly Sector Watch report, and in additional reports as appropriate. Questions, comments welcome.
The following (green highlights) is one of the 13 charts and the accompanying analysis/commentary that were featured in Monday’s (February 11th) Keys To This Week report.
Keys To This Week is a Monday morning, bullet-pointed list of key market factors, data series, and corresponding charts pertaining to the US stock market and market sectors, US interest rates, the US Dollar, and economically-influential commodities, that explains how they are likely to influence US financial market direction during the upcoming week and over the next several months.
It utilizes a comprehensive list of market metrics including intermarket relationships, investor sentiment, seasonality, relative performance, investor asset flows, market breadth, and price patterns and trends to formulate an “under-the-hood” analysis and forecast of the US financial landscape that tends to be more forward-looking than the typical Wall Street approach.
Today’s chart and analysis focuses on our own proprietary metric, which analyzes historic asset flows in US market sector ETFs to determine which sectors are attracting, and losing, investor assets.
Our work shows that this follow-the-money approach is what ultimately drives relative performance.
Excerpt From: Keys To This Week
Asset Class: US Stock Market Sectors
Topic: Investor Asset Flows, Consumer Discretionary Sector
Date: February 10th 2014
The long red vertical rectangle on the right edge of Chart 7 below, which is one of our new sector-related metrics, shows that the daily percentage of the “sector pie” that Consumer Discretionary comprises collapsed to just 6.8% through the end of last week, from 9.7% on December 5th.
This frantic exodus of investor assets out of Consumer Discretionary really accelerated last week, as the percentage of all sector bets that the sector comprises declined from 8.0% on January 31st. As long as the percentage of the pie that Discretionary comprises continues to shrink, recent relative sector underperformance is likely to continue.
However, another factor to consider is that last week’s flush of assets out of the sector suggests a capitulation that could eventually led into a rebound/recovery.
Our metric, plotted in the lower panel of the chart above, declined below its 63-day (one business quarter) moving average in mid December, indicating that the percentage of all sector bets within the universe of Sector SPDR ETFs being allocated to Consumer Discretionary was shrinking from a quarterly standpoint. The Consumer Discretionary SPDR ETF (XLY) actually peaked in relative outperformance versus the S&P 500 SPDR ETF (SPY) 2 weeks later, on January 2nd, and has subsequently underperformed the broad market index by 3% through the end of last week.
Consumer Discretionary outperformed the S&P 500 by 9% during 2013. However, if you were overweight Consumer Discretionary heading into January, you gave back all of the relative outperformance you had accrued since mid August in just 5 weeks.
More broadly, our asset flow metrics indicate that investors moved out of Consumer Discretionary and Consumer Staples last week, and into Materials and Technology.
Asbury Research subscribers can view the entire report by Clicking Here.
Interested investors can get further information including services and pricing, or request a Free Trial, by Clicking Here or by calling 1-888-960-0005.
The following (green highlights) is one of the 12 charts and the accompanying analysis/commentary that were featured in Monday’s (February 3rd) Keys To This Week report.
Keys To This Week is a detailed weekly outline of key market factors and corresponding charts pertaining to the US stock market and market sectors, US interest rates, and the US Dollar, that are most likely to influence US financial market direction during the upcoming week. It includes a comprehensive list of market metrics including intermarket relationships, investor sentiment, seasonality, relative performance, investor asset flows, market breadth, and price patterns and trends to formulate a forward-looking analysis of the US financial landscape.
Excerpt From: Keys To This Week
Asset Class: US Stock Market Sectors
Topic: The Utilities Sector
Date: February 3rd, 2014
The green ellipse in the lower right edge of Chart 9 below, one of our new sector-related metrics, shows that the daily percentage of the sector pie that Utilities comprises has increased to 6.7% as of Friday from just 5.3% on January 3rd, which lifts it above its 63-day (quarterly) quarterly moving average for the first time since May 2013.
The green vertical highlight between both panels show that the Mar 28th through May 2nd 2013 period was the most recent instance that the percentage of assets invested in Utilities rose above its quarterly moving average, and that this coincided with the most recent period of relative sector outperformance. Accordingly, as long as the percentage of sector bet-related assets continues to expand, recent relative sector outperformance will be expected to continue.
We are particularly interested in the Utilities Sector right now because of its correlation to both long term US interest rates and the US stock market.
Asbury Research subscribers can view the entire 12-chart report by Clicking Here.
Here are some interesting stats to consider as we close out January.
- the S&P 500 has posted a negative February 46% of the time.
- the S&P 500 has posted a negative February 64% of the time in years that posted a negative January.
- the S&P 500 has, on average, closed -0.12% lower in February.
- the S&P 500 has, on average, closed –1.6% lower in February in years that posted a negative January.
Charts and more detail on February seasonality will be available in our February Global Seasonal Analysis report, of of 8 different reports that we produce, which will be distributed to subscribers later today.
The following Research Excerpt (green highlights) is from our January 10th What We’re Watching Today report, entitled US 10-Year Vulnerable To A Decline From 3.00% (access requires subscription).
What We’re Watching Today, one of 8 different reports that we produce for subscribers at various intervals throughout the month, is a short, quick report that we use to identify important and often actionable changes in current market conditions, typically before the US stock market’s opening bell. These reports can focus on anything from a key support or resistance area in an influential financial market, or a current indicator extreme that has historically preceded important trend reversals.
Excerpt From: What We’re Watching Today
Asset Class: US Interest Rates & Treasuries
Topic/Title: US 10-Year Vulnerable To A Decline From 3.00%
Date: January 10th, 2014
The black line in the upper panel plots the daily close in the yield of the 10-Year Treasury Note since 2009 in the upper panel, with a monthly market momentum metric plotted by the blue line in the lower panel.
The red highlights show that our monthly momentum gauge in the lower panel has very recently reversed downward from overbought extremes, and that previous instances of this have either coincided with or led literally every significant peak in the yield of the 10-Year in recent history, amid a coincident bottom in long dated US Treasury prices (not shown).
Conclusion, Investment Implications, Strategy
The recent retraction from monthly overbought extremes by the indicator in the lower panel of the chart above suggests that, from a monthly momentum standpoint, conditions are now favorable for a meaningful decline from the 3.00% area to emerge in the yield of the 10-Year Note, as long dated Treasury prices rise.
The yield of the US 10-Year actually peaked one week before our January 10th report, at 3.04% on December 31st, and has since declined by 29 bps to 2.75% as of last Friday (January 24th).
22 bps of that decline occurred after our report was distributed to subscribers. During that same January 10th through Friday January 24th period, the price of the CBOT 30-Year T-Bond has risen by 3 29/32nds or 3% while the iShares 20+ Year Treasury Bond ETF (TLT) has coincidentally risen by 4.42 points or 4%
History shows that once our metric moves to opposite oversold extremes, we are likely to see a significant near term bottom emerge in long term US interest rates as long dated US Treasury prices peak.
Sector Watch, one of 8 different reports that we produce for Asbury Research subscribers, is a monthly report that reviews and updates our current picks for relative outperformance or underperformance in the various sectors of the S&P 500, and also discusses emerging sector-related opportunities for the upcoming 1-2 quarters according to a number of metrics including market momentum, investor asset flows, and price structure in related assets. Our sector rotation analysis is an integral part of our macro forecasting process for US financial asset prices and the broader US economy.
We recently added some new, proprietary metrics to our sector analysis to better determine not only when new trends of relative outperformance or underperformance are likely to emerge, but more importantly when sector-related asset flows support and and can potentially fuel these emerging new trends.
The following (green highlights) is an excerpt and several charts from our January 10th Sector Watch report (access requires subscription), which introduces and explains these new metrics.
New Sector-Related Indicator Additions For 2014
For years we have measured investor asset flows between the various sectors of the S&P 500 via our own metric, a pie chart that displayed the percentage of sector bet-related assets as represented by the Rydex Sector Funds, that were invested in each sector of the S&P 500 as represented by the iShares Select Sector SPDR ETFs. We initially used the Rydex funds because, at the time, they were the only sector-related funds that published their asset flow data daily, and had enough data history to make our metric meaningful.
However, effective immediately, we will be using a new, and we think much better, sector asset flow metric that replaces the Rydex asset flow data with the actual data from the Sector SPDRs, the latter which have now accumulated enough history to be a more meaningful, apples-to-apples study of current asset flows in sector ETFs. We have also added some additional sector-related asset flow metrics that allow us to more accurately and precisely follow the money in US market sectors. These new charts will always appear in Sector Watch, and will also be included in our other reports as appropriate including Keys To This Week.
Here they are, with a brief explanation of each.
New Composite Sector Asset Flow Comparison Charts
Chart 1 shows the historic daily average distribution of investor assets in the 9 Sector SPDR ETFs since our data series began in June 2006.
Chart 2 displays the distribution of these sector bet-related assets on January 7th. The red highlights show that the two most over-invested sectors are currently Consumer Discretionary (9% of the sector pie vs. 5% historically) and Industrials (12% versus 7% historically). The green highlights show that the two most under-invested sectors are Utilities (6% vs. 11% historically) and Energy (11% vs. 18% historically).
This metric is not a near term timing tool that tells us what to do today, but rather a more intermediate term metric that identifies the sectors that are currently “offsides” according to historic investor asset flows, and have thus have the most potential for an upcoming move back to historic norms over the next 1-2 quarters.
Daily “Percentage Invested” Charts For Each Sector
These charts are brand new for us and, to our knowledge, no one else is doing anything like this. The blue line in the upper panel of Chart 3 (next page) plots the daily relative performance of the Financial Sector SPDR ETF (XLF) versus the SPDR S&P 500 ETF “Spyder” (SPY) since 2012. The black line in the lower panel plots the corresponding daily percentage of the sector pie (as shown in Charts 1 and 2) that the Financial Sector comprises, along with its quarterly moving average (63-day, red line).
There are 3 important questions to ask yourself when interpreting this metric:
- Is it at an historically high or low extreme?
- How has the relative performance line reacted when it’s been there before?
- Is the percentage of the “pie” that the sector comprises growing or shrinking?
The green highlights show that periods when the daily percentage of the “pie” that Financials comprises is expanding, above its quarterly moving average, the sector typically outperforms the S&P 500 (the blue line in the upper panel rises). Conversely, the red highlights show that when the daily percentage of the “pie” is shrinking, the sector typically underperforms (the blue line in the upper panel declines).
The green ellipse at the lower right edge of the chart shows that the percentage of the sector pie has most recently expanded back above its quarterly moving average indicating that the amount of sector bet-related assets being allocated to Financials is increasing. As long as this continues, recent relative sector outperformance is likely to continue as well.
Daily Asset Flow Charts
The blue line in the lower panel of Chart 4 below plots the total daily assets invested in the Industrials Sector SPDR ETF (XLI) since 2013, with the 21-day (one business month) moving average of these assets plotted in red.
The red highlights show that when these assets are contracting, below their monthly moving average, XLI declines. However, as long as the daily assets remain above their moving average, this new money – think of it as “trend fuel” – coming into the fund keeps the positive price trend intact.
These changes and additions provide an accurate, detailed, and insightful under-the-hood look at what is going on in the various sectors of the S&P 500, to:
- indicate which sectors are historically over or under invested
- define how the sector has previously reacted to similar extremes in investor participation
- determine when investor participation in a given sector is increasing or decreasing
- show when daily asset flows support a trend reversal.
On Wednesday January 15th, the Market Technician’s Association’s (MTA) Educational Web Series presented a webcast event featuring John Kosar, CMT, from Asbury Research entitled:
Watching The Smart Money In Gold, US Bonds,
& Its Potential Effect On US Stocks In Q1 2014.
Click Here and use the password markets for:
- A video replay of the webinar
- The accompanying PDF from the webinar
- A 2-week trial subscription of Asbury Research’s Keys To This Week report
- A Special Offer for a 3-month subscription to Keys To This Week at 29% of the regular price (a limited number are available)
- “Smart money” commercial hedgers are making an aggressive bet that gold is undervalued at $1200 per ounce.
- Gold prices are inversely correlated to the yield of the US 10-Year Note, so as goes gold prices so are likely to go long dated US Treasury prices.
- “Smart money” commercial hedgers are making an aggressive bet that 5-Year Treasury Note prices will rise.
- US 10-Year Treasury yields are positively correlated to the S&P 500, so a rise in Treasury prices would indirectly warn of an upcoming US stock market correction.
- Near term, major US stock indexes suggest the potential for an additional 3%-5% advance.
- Intermediate term, corrections aside, current intermarket relationships suggest the potential for an eventual, additional 9% to 15% advance in the S&P 500.