Friday, February 24, 2017

ECB: tapering since April 2017

The meeting of the European Central Bank that took place in December 2016, was key for the world markets. Their conclusions were more or less what was expected:

 - Neither the rates (0%) nor the deposit rate are touched, they are both in dangerous negative territory, with deposits at -0.4%. Consequently, the yield of European short-term bonds, sensitive to these data, came strong at rise, because they feared a drop in rates.

 - The ECB can buy debt at rates below -0.4% referential and 1 year (the previous minimum was 2 years), which can buy debt from countries with negative rates in the short term (the case of Germany). This detail abruptly turned the 10-year German bond yield (the Bund, European benchmark) downward, ending at 0.38%.

Today, the 10-year German bond (Bund) was very volatile as 
the decisions of the ECB were being digested.

- As of April 2017 the monthly purchases of 80,000 to 60,000M euros are reduced, that is, the tapering begins, although later, in the conference, Draghi hinted that the initial amount can be returned if the situation demands it. With these huge purchases (which can become a dangerous vice) the ECB helps to keep the yield of the bonds very low, because it increases their demand and with it their price.

 - These tapering will continue until December 2017 (no longer September). European banks happy with the news: more issuance of money for purchases of their corporate bonds.

 - Then in the usual conference, Draghi commented that he does not see inflationary pressure, nor deflation, foreseeing 1.3% for 2017, even far from the 2% target. This data will impact on the euro that follows its fall, as it sees far the rise in interest rates.

- In terms of growth, it foresees a GDP of 1.7% for this year and 1.7% for the next, higher than the previous estimate of 1.6%, good data for stocks, who favor solid economies.

 - Brexit and the election of Trump believes will see effects only in the medium and long term.

The Eurostoxx50 index, which measures the eurozone, continues with its 2-week rise, today at +1.21%, struggling to finally break the resistance at 3,150, which lasted all of 2016, to close the year up. Wall Street, on the other hand, reacted with moderation (SPX +0.01% now), despite a good data from Jobless Claims that reinforces the labor market. In currencies, the euro reacted weak against its peers, including the dollar, the EUR/USD at -1.22% at the moment. For now, these are the data and immediate consequences.

With the decisions of the ECB that ranging market of the Eurostoxx50 all 2016 can break its resistance.

The Recommended Reading

Over the years I understood that risk management is the sure way to succeed in the daily stock trading. One of the ways to manage the risk is to study the industrial sectors daily and trade according to them. 

The present article of makes a technical analysis of the 10 sectors that form the GICS classification, graphically using the Relative Rotation Graph RRG quadrant, where at a glance you can identify the leading sectors today, those that are falling , weakening and reinforcing. I literally transcribe your suggestions for these days, quite coincident with what was expressed in previous posts of this blog.

- Well defined sector rotation at the moment
- Avoid Utilities, Staples and Health Care as they push deeper into the lagging quadrant
- Watch Technology as it rotates inside the weakening quadrant
- Financials are still leading, but relative trend is getting mature
- Energy and Industrials inside leading quadrant offer potential
- Prefer Materials over Discretionary inside the improving quadrant

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Thursday, February 16, 2017

Construction comes strong with Trump

Within the discretionary sectors XLY, in strong rise from Trump, one of its subsectors that will be favored is the construction, one of the most dynamic and engine of all economic reactivation, as it did in the years following the crisis of 2009. So, its behavior in these last two years has been rather erratic.

On Thursday, its index $DJUSHB had its highest daily rise (+3%) in 9 years due to the strong fundamental data of Housing Starts yesterday, which measures the start of new residential construction in that country. If we add to this its weekly candle chart that shows bounce in the diagonal support, and aimed at exceeding the SMA200 average, the expectations are very high for a trader. On my radar I already include high market Cap homebuilding companies such as Lennar LEN or Taylor Morrison TMHC.

The hedge fund manager Todd Sullivan bases it from the banking point of view, given its close relationship with the construction of new houses: the current narrow margin between the interest rate of the bills (bonds maturing at 1 year) and the notes ( mature to 10 years), that is to say an adjusted yield curve, prevented the easy access of those interested in obtaining a mortgage loan for their home.

El hedge fund manager Todd Sullivan lo fundamenta desde el punto de vista bancario, dada su estrecha relacion con la construccion de nuevas viviendas: el actual estrecho margen entre la tasa de interes de los bills (bonos que madura a 1 año) y las notes (maduran a 10 años), es decir una ajustada yield curve, impedía el fácil acceso de interesados en obtener un préstamo hipotecario para su vivienda.

Housing. Technically: rebound in the trendline, and routed to the SMA200. Fundamentally yesterday its best result in years. Plus the aggressive policy of Trump: the construction sector is strong.

The Cannabis Stocks

The legalization of marijuana is already on track in the US, and will be in the ballotage of nine states today, including California, which represent 25% of the North American population. There are several legal companies, most penny stocks, grouped under the MJIC North American Marijuana Index and traded on the Over the Counter Bulletin Board (OTCBB), in an industry that completed an impressive growth of 17% in 2015. And the surveys They indicate that 57% of adults are in favor of the legalization of cannabis as a medicinal and recreational drug. A similar trend is taking place in Canada and countries in Europe.

Although I am not a supporter of the legalization of marijuana, here I act more as a trader: it is too interesting a niche to put aside. The success will be in choosing the companies that will prevail over the rest. Without being a guru on the subject, I opt for the moment for the largest Market Cap, the highest volume of transactions and the characteristics of your business. I suggest three, after reviewing their fundamentals:

- Terra Tech Corp TRTC, Market Cap $ 175M, yesterday with 22 million transactions, is perhaps one of the most popular stock, this year with an increase of 336% (!), Focused more on the agricultural aspect of the plant: crops and production.

- Growblox Sciences Inc GBLX, penny stock of only $ 35M of capitalization but with a high volume of transactions, which allows trades with little spread. Very focused on cannabis chemistry research, which turns it into medicines and therapies. I see potential.

- American Cannabis Inc AMMJ, dedicated to design and consultancy, is associated with Canadian companies, which makes it a binational business. Its capitalization is $ 85M and it has a good volume of transactions in the stock market.

- Canopy Growth Corp TWMJF, largest producer and Market Cap of Canada, with exponential growth in sales.

There are other interesting companies: Medicine Man MDCL, focused on cannabis consultancies from growth techniques to retail operations or Cannabis Sativa Inc CBDS whose stock grew almost 2,000% YTD (!). According to the results of the ballotage of today it will be seen if it is convenient to do trading (not investing) in th risky industry, like all penny stock companies. A Hillary victory would pop up this sector.

GBLX has the potential to grow. His ichimoku shows a clear bull strategy, 
by today surpassing the blue conversion line to the red base line on the cloud.

Pause in the financial sector rally

The post-Trump rally of the Finance XLF sector (-1.3% today) seems to be losing strength, for the moment, for the traders (included) that are collecting profits, the usual profit-taking after a powerful rise like this. However this sector may end up being one of the biggest beneficiaries of Trump's policy.

His 15-year weekly chart relative to SP500 shows two details: the high ratio he had in the last Republican government (Bush, 2001-2007), more than double the current value, and also an interesting cut of the bullish symmetric triangle pattern, indicating that in the long term it can continue in that trend. I will wait for the brief fall of these days to restart long positions there.

The graph, taken from StockTwits, not only breaks the triangular pattern, 
but also the average line SMA10. Very good signals for XLF.
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Friday, February 10, 2017

Trump election: an epic day for Wall Street

Since three months of Trump election, let's review my post of that incredible session in Wall Street:

An epic day yesterday for the trading of Wall Street. Known already Trump's triumph, a real surprise for everyone, we are now interested in knowing how you can go to the stock market after this event. I will not comment on the political aspect because it is not a motive of this blog, although my opinion favorable to the republican had already expressed before.

The day was amazing: on election morning it looked like everything was going to be aimed at a tight triumph of Hillary. However, something called my attention in my daily trading: there were a lot more puts than calls for the SPY, the etf that follows the SP500 index. The Put/Call Ratio indicator was flying ... this meant that Trump's triumph was in the minds of many, since a very strong fall in the market was discounted if he won.

Already at night, closed the polls and with the first results of the states, began to glimpse a winner Trump. Wall Street perceived it and its most accurate indicator, the futures of the SP500, /ES began to fall as expected. After hours and with Trump's victory in Florida, it sank -5% (!), The Dow Jones was more than -700 points (!!), the future of gold /GC reached +4%, and the Japanese stock market was sinking. This remained until the triumph of the Republican. Just in the early morning when he gave his first words, very conciliatory, talking about unity and Hillary's greeting, Wall Street reacted timidly, thinking that maybe not everything was going to be as bad as the liberal press painted it. The next day, the market opened with the SPX in negative territory (-2%), to recover quickly with great force, something totally unthinkable the previous day, the Dow almost reaching its all-time high, the European stock markets rising and gold receding to flat ... crazy!

The election week, from bull Monday when the FBI 'cleaned' Hillary, going through the electoral night, the unexpected outcome of the markets yesterday and today in all time highs.

After the event, today it is urgent to know in detail the next Trump economic proposals: tax cuts, tax deficit and public spending treatment, lower regulations, trade agreements and tariffs on imports, Obamacare, etc. to see where to make the best investments and trades, depending on the sectors where he will put more emphasis on his political plan. While this is not clear, all market movements (today began strong upward to normalize at noon) are pure speculation, the 'buy on rumor, sell on news.'

Special mention, the rise of the XLF Finance sector, after the Trump victory, today again in ranges of +3-4%, so the etf that follows this sector at triple speed (3X), the FAS, can be an attractive opportunity to make cash these days. Trump offered a more relaxed regulatory environment, and an increase in public spending to grow the treasury supply. This should raise long-term interest rates, benefiting this sector. And higher long-term yields can boost bank profits, since they increase the spread between what banks earn by financing longer-term assets (loans) with short-term liabilities. Hence, the increases in this sector can continue.

Trump's promise to 'rebuild the country's infrastructure' coupled with its proposal for tax cuts, suggests that inflation will increase with more growth (and debt) and with it higher interest rates. As a result of this, the US Treasury Bonds reached their highest levels of the year yesterday: those that measure the yield, TNX (T-Notes to 10 years) and TYX (30-year T-Bonds), yesterday had increases of the order of +10% (!). Of course the dollar /DX was also very solid yesterday against all its global peers. Conversely, treasury futures, which fear the word 'inflation' /ZN (10-year), /ZB (30-year), or the etf TLT, which measure the price of bonds, fell in the range of 3 to 4%. It is discounted (US bets already at 80%) that the FED will give the Rate Hike in December.

Closing of the main indices, yesterday November 9, post-Trump. To remember.

Within the other sectors, Utilities XLU is the weakest for the second consecutive day, meaning it is a purely defensive sector. The opposite happens with Health XLV that goes very well. Remember that Hillary had promised a strict control of prices and patents to the pharmaceutical and biotechnology sub-sector. Good investment opportunity there. On the other hand, the XLK technology sector is being hit by the idea that Trump can limit commercial agreements, vital for this sector. As indicated above, knowing well the Trump plan we will know where the money will flow. In advance, attentive to Finance, Biotechnology, Infrastructure and Energy.

Today at noon, sectors Finance, Industries and Health remain solid as yesterday. Volatility VIX returning to its average. Continue the Trump effect.
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