Has the Fed Ignited the Sell in May and Go Away Trade?

First and foremost most fed meetings are positive for the stock market. The fed usually gives the market what it wants and the markets keep going up and away. The last fed meeting stocks rallied after the fed successfully jaw boned the dollar into submission. Since then stocks have rallied and are encountering major resistance at the top end of their trading ranges.

The dollar has sold off close to 5% but has already contributed to  very weak quarterly earnings reports from several global powerhouses. With Greece lurking in the shadows any Euro strength may be short lived going forward and a resumption of broader dollar strength is likely.

This could spell trouble for commodities like gold and oil and other risk assets.



Eventually carry trade liquidation could spread to stock indices, with some recent bastions of strength like the German and Indian markets already showing some cracks.



Eventually markets will come around to the realization that QE forever polices globally have artificially propped up asset prices and their implosion is just around the corner in a painful and protracted process, with the "Sell in May and Go Away" trade just round the corner.

S and P 500 VIX Ratio Suggestive of a Topping Process

It is noteworthy that the Vix is no longer making new lows as the S and P 500 is making new highs. The S and P Vix ratio is making a long term rounding top, which is highly suggestive of a near term topping process in the S and P.There have been no new highs in this ratio in more than 11 months, suggesting that volatility is outperforming the market and may surge upwards in the upcoming months. Chart courtesy StockCharts.com.

Transports S and P 500 ratio, No new highs in more than 1 year

For a healthy advance in the market according to dow theory the transports ought to be making or conforming new highs in the broader market. Taking a look at the transports S and P 500 ratio, there has been significant underperformance of the transports of late, with no new highs in the transports and consequently the transports s and p 500 ratio since the December of last year. A major bearish divergence. Chart courtesy StockCharts.com.

Option strategy to capture the next big move in the market

It appears that volatility will be the name of the game going forward. The Vix appears to be headed upwards in the short term. If volatility was to surge upwards implied volatility on options would do the same. On the daily chart the S and P 500 looks set to break out of a coiled spring like formation out of its recent trading rage between 2040 and 2120.  A strangle strategy would help in capturing this as earnings season begins.
Current S and P 500 spot - 2076


Looking at options prices on the CBOE expiring April 30:
2070 puts are available near $25
2080 calls are available near $24
Break even points - 2021, 2129
make money - below 2021 or above 2129
loose money - between 2021 and 2129.

It is note worthy that several asset classes are on the verge of breakouts from their recent trading ranges and such a strategy could be extended to them. In the commodity space gold, copper and crude stand out:



In the forex space the Japanese Yen crosses particularly EUR/JPY, AUD/JPY and GBP/JPY stand out:

Nifty Gold Uptrend in Question

The Nifty has been in a continuous uptrend against gold (in dollars). Gold has been falling on deflationary fears. As the deflationary theme plays out and eventually spreads to risky assets like stocks a catch up to the downside is likely for stock market indices like the Nifty. A pull back thus seems to appear on the charts with Nifty under performance vis a vis gold in a deflationary context.Chart courtesy StockCharts.com.

Nifty Over Extended Vs the Dollar

The Nifty has been even out performing even the strong dollar off late.  The dollar has been strengthening significantly this year and has virtually out performed a whole host of asset classes. The Nifty and few other stock indices like the S and P 500 and the German Dax have outperformed the dollar. A bit of under performance vs the dollar has begun and is overdue for the Nifty. Chart courtesy StockCharts.com.

Baltic Dry Index still near life lows

Check out this chart from StockCharts.com for the baltic dry index, which is close to its life lows and down over 95% from the highs set in 2008. Obviously the massive influx of liquidity form QE's in the US, Europe and Japan hasn't really helped the global economy.

Behind the tantrums of QE withdrawal lies a very grave deflationary threat

Last week most risk assets sold of on the prospects of QE withdrawal following strong job numbers out of the U.S. Here's how things shaped up:
The S & P 500 was down well over 1%
Gold  was down close to 1%
Oil was down close to 10%
Copper was up about 2.5%
Emerging markets were down close to 3%
The clear winner was the dollar which surged nearly 2%

If markets were really bothered about inflation, gold and oil would be going through the roof instead they have absolutely collapsed over the past year:



In addition the flight to quality trade that surfaced during the recession of 2008 into the dollar seems to have emerged with a vengeance:

While one may want to brush aside the emergence of deflation which has already started to surface in recent PPI and CPI numbers, let's not forget what it did to Japan since the early 90's. Despite the all out war to contain deflation in Japan interest rates are still negative and the stock market which has rallied off late is still down over 50% from the highs it set in 1989.

Warning Signs for Global Financial Markets in 2015-16

There are two major warning signs that are developing for risk assets in 2015:

First we have significant #dollar strength despite a recent bounce in the euro, with the dollar index hitting multi-year highs. This is on the back of the potential end to the quantitative easing by the fed but also due to weakening fundamentals in the# Euro Zone which is mired in a deep recession and is unlikely to come out of it any time soon despite huge dosages of QE from the ECB.



Even after another bailout for Greece, which is tantamount to throwing good money after bad dollar strength is all set to continue and would result in a serious bout of carry trade liquidation that could take down commodities, emerging market currencies and eventually global stock markets:





The second major development is the potential upsurge in volatility. The #Vix index has not made new lows on each of the recent new highs for the S and P 500 in well over a year and is holding support in a multi year rounding bottom formation. This has resolved into higher prices for the Vix over the 50 level in August and lower prices for risk assets across the board. The Vix is incidentally well above it's 52 week low of 10.28.

Both these trends are set to continue into 2016 which could result in significant under performance of financial markets across the globe.

Warning signs for risk assets in 2015-16 http://t.co/SC6JzKADnp pic.twitter.com/JlxRFU9vxy

— samuelR (@RajveerRawlin) September 7, 2015

Down goes the Baltic Dry Index yet again

Another 28 year low for the baltic dry index, now down over 95% from it's all time highs, questioning the so called economic recovery these last 5 years and confirming that QE forever policies in the US, Japan and the Euro Zone are destined for failure. Eventually the weak economy globally should translate into lower asset prices across the globe.

The dominoes keep falling one after another

Lets take a look at a few charts courtesy yahoo finance and market watch.com. First we started with the well over 95% crash in the Baltic dry index (#bdi).

Then we had a over 40% plunge in #gold and #silver prices as symbolized by the respective ETF's:




This was matched by over a 40% plunge in base metals:



Followed by the dramatic over 50% plunge in #oil:


This has translated into a rout in the junk bond market:

Which will most certainly nail banks which have exposure to this toxic stuff:


No surprise then at the flight to quality bid emerging in US treasuries and the #dollar:




And carry trade liquidation should start any moment with a bid for the Japanese #Yen:


All in all we have sown the seeds for the great depression of the 21 st century and the U.S Fed and its fellow central banks can do absolutely nothing about it.

The dominoes Keep falling one by one http://t.co/lfL8gIu1o2 pic.twitter.com/wAkJpkNixp

— samuelR (@RajveerRawlin) September 8, 2015

Deflation to trigger junk bond rout?

The deflationary collapse of oil is clearly threatening to take down other risky asset classes with it, most notably of late the junk bond market


the makings of a brand new financial crisis!

Collapsing Oil price flat out deflationary

The recent 40% decline in oil the past 6 months is flat out deflationary. Look at the popularly traded oil ETF. This taken together with the collapse in other industrial commodities has generated a major deflationary signal. The collapse in the Euro also lends further support to the deflationary theme emerging.




The last time oil approached it's cost of production was just before the financial crisis of 2008. Just a matter of time before the collapse in gold, silver, copper, oil and other industrially sensitive commodities spreads to other risky asset classes like stocks.