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Brad McFadden manages a proprietary global macro fund. He invests by trading the primary direction of asset classes and also looks for extreme deep value situations, providing "liquidity" to panic buyers and sellers. He publishes his investing approach through,... More
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  • Equity Markets Will Be Higher By Year End
    It is said that the best time to by is when there is "blood in the streets" or "at the point of maximum pessimism". Well, given the shocking footage coming out of Japan and the carnage that has beset financial markets in Japan and the world at large, it could be argued that this point is now. 

    But are investors "walking into the pit" to buy? From what I can gather after listening to all the banter coming from the press of popular opinion it appears that few if any are stepping into the ring. This tells us something about the underlying condition of the market.

    A top in the market is characterized by the insistence of bulls not to throw in the towel with any weakness. A market top is a process not a point. If we go back in time and look at all market tops they are characterized by chart patterns like  double tops, triple tops, head and shoulders etc not inverted "V" shapes. 

    Ever since this bull market got into gear in March 2009 it has been characterized by a general reluctance of the crowd to believe in equity prices moving higher. Every bearish excuse for equities not to go higher has been thrown at the market yet it has moved dramatically higher. I have said on many occasions before that "this has been the most hated rally in market history" and that "the bulls are not genuine for the first sign of trouble they jump ship". 

    This sort of fleeting behavior by the bulls  is not what is normally seen at the beginning of a major decline. Rather it has all the markings of a normal bull market. Until I see evidence of a change in the underlying condition of this market I continue to see any weakness as a buying opportunity.

    It is not the easiest thing in the world saying this in the light of Dow and Nikkei Futures being down some 280 points and 1,100 points respectively at time of writing but I believe in my process and I refuse to sit on the fence.

    Disclosure: I am long DIA, EWJ.
    Tags: DIA, SPY, QQQ, IWM, EWJ, Equities
    Mar 15 3:52 AM | Link | Comment!
  • Continue to Hold a Bullish Course
    Every week I sit down and try to address the big picture in financial markets through the use of just 8 charts. I try to keep things simple by cutting out the noise and focus on the big picture. So where are we? Well in essence there is no change to our outlook that we have held since the end of 2008, that is, we remain bullish on equities, commodities, the carry trade and corporate bonds and bearish on US treasuries and the USD. Our views are based on fundamentals, technicals (what the market is telling us) and sentiment (where the weak hands are positioned). Lets kick into it and work our way through each asset class.

    What is the problem with equity markets? Well the big problem appears in getting Moms and Pops to believe in what is blatantly happening before their very eyes! What are we up to now, some 30 weeks of redemptions from equity mutual funds? To me this is the ultimate indicator of how oversold equity markets remain. Yes we are assured that equity markets are overbought by the likes of various sentiment surveys.........and guess what the market keeps on advancing! Hasn't anyone figured out that these "surveys" are now completely useless? The only way to judge the true character of a man is to see how he reacts when the "chips are down"! I have seen many self proclaimed tough guys turn into nervous wrecks when the heat goes on. In a similar vein you can only judge how overbought a market is when there is a pull back. Why? Well the last 12 months is case in point. How many times have we seen punters purporting to be bullish one week but quickly turn to the dark side of the force when there is a little bit of weakness in the major averages! Yes if there has been one thing that has characterized this market since the end of 2009 it has been the general unwillingness of punters/bloggers/analysts (call them what you will) to hold out in the face of "danger". The crowd still appears obsessed with anything that can be remotely construed as being bearish, the Irish debt "crisis" is a class example of that. 

    Now it is not so much the behavior of the major market indices that encourages me, rather it is how the likes of the Russell, Value Line, Microcaps and Midcaps recover quickly after a set back.  All these indices, which depict the behavior of the "average listed" stock, have been outperforming the major market indices and this trend has been evident from as far back as the start of last year. This is a classic sign of a bull market and the first thing that one should learn when studying the behavior of the market. 

    There is another behavioral trend that has become very apparent and that is everybody seems to be focused on the short term. It seems that everyone is hanging onto the next employment figures, PMI, earnings release, FOMC meeting, every word that Bernanke mutters........ no one seems willing to try and look past their noses. Maybe the flash-crash put the fear of the almighty into everyone.

    Fear, fear, fear and yet more of it, but hasn't anyone worked out that equity markets move in the path of least resistance. If everyone is fearful (bearish) who is left to become fearful? The old adage "equity markets like to climb the wall of worry" is not a sick joke! I remember the Dow bottoming on the 24th (or it could have been the 23rd) of September 2001 and climbing 100 points every day in the face of a horridly fearful general populace! You don't forget things like that in a hurry!
    Is the behavior of emerging market small caps suggestive of a bear market to you? OK it was touching go in late May this year, I held my bullish view but I did turn various shades of green at the time.......but did you note how emerging market small caps then set about making higher highs and higher lows even though the S&P and Dow threatened to make lower lows in June, July and August? There are two little know ETFs - DGS and EWX that track emerging market small cap stocks. Study them in detail because they are the best leading indicator for the Dow! Note that in March 2009 the VTI made a lower low, but the ETF DGS didn't! Yes it will happen again but it will be the reverse this time. The VTI will make a higher high but DGS will fail to do so - that will be your cue to quietly start ditching US equities, the signal that the next material move to the downside is at hand. We are nowhere near that condition right now. World equity markets are going materially higher before going materially lower. 

    Bull markets end with a big bang not a whimper. There needs to be a dramatic speculative blow off where everyone is talking about a new paradigm, this time it is different etc. There also needs to be a change in the way consumers consume.......and I don't see any evidence of consumers cutting back on food, driving less etc. What sorts of behavioral changes am I looking for to evidence an end to the big bull market in commodities? Well, perhaps kids walking or riding a push bike to school again as they did back in the 1970s and 1980s instead of being driven! Perhaps people eating less and the girth sizes of the western world at least decreasing a little! 

    More evidence that folks don't want to genuinely believe in the rally in commodities - we are assured that silver is advancing because it is being manipulated. That JP Morgan is holding a massive short position in Silver. We are also told that it is crop failures which are to blame for the massive increase in foodstuff commodities. Has it not occurred to the average punter out there that EVERY COMMODITY KNOWN TO MAN IS RALLYING and is more or less trading at multi-month highs? Now there is the Chinese tightening thing, and yes austerity measures in Europe will dent growth and the desire for commodities. Yet the Chinese tightening and austerity measures in Europe are not new things and guess what has just happened to crude - it is trading at a multi-month high. Just a few months ago we were assured of the Double Dip and the "Deflation". I was intrigued that against the toxic backdrop crated by the Double D and the Big D commodity prices rose! I wonder if all the Double Dippers were putting their money where their mouth was and shorting commodities and equities then? 

    I love those immortal words of Optimus Prime (I have had the pleasure in watching Transformers about 18 times courtesy of my kids) "fate rarely calls upon us at a moment of our choosing". In a similar fashion bear markets begin when you least expect them. I certainly wasn't expecting treasuries to decline on the announcement of the QE2 thing! Well they are and rising yields are not just limited to US treasuries - it is a global phenomenon. Remember nothing exists in isolation! In any event............where are moms and pops crowded, equity mutual funds or fixed income mutual funds? Where Moms and Pops are positioned is where all the selling will occur. Suffice to say this - treasury markets are neatly positioned for the start of a multi-year bear market. Think about it, very few investors in treasuries know what a bear market is like! Now what is the worst enemy of treasuries? Inflation...........and what are rising commodity prices suggestive of? Well it certainly isn't "deflation"! The Fed wants inflation and they are going to get it, only they may well get a lot more than they bargained for which will make their idea of keeping long term mortgage rates low a figment of their imagination! 

    If the US economy was in trouble, or should I say if the equity market was in trouble why are highly risky junk grade bonds rising? Why have they been rising with relatively little interference to their up trend since March last year? The average equity investor would be better served analyzing the behavior of the junk bond market than anyone of the major market stock indices! 

    Now do you hear anyone boldly saying that the Euro will be trading above 1.50 by this time next year? Well I don't which suggests that there are no genuine bears of the USD! Europe has its problems but they are at least dealing with them here and now, but the US (and Japan) appear to be happy to kick the can down the road.

    In the past the carry trade has followed closely the fortunes of emerging market equities (NYSEARCA:EEM) and commodities (NYSEARCA:GCC). However, for some bizarre reason the carry trade (NYSEARCA:DBV) has diverged from the behavior of emerging markets and commodities over the last 18 months. Is this a reflection of how bearish the general populace remains? I think so. Now that Crude has broken to a multi-month high along with the Value Line index in the US I am fully expecting the carry trade to breakout to the upside.

    It has been a long hard road this year. Long in the sense that the dip in May was a little deeper than expected and  it has also taken much longer to recover than expected but everything from a bullish perspective remains in order. What pieces in the jig-saw puzzle are left? That would be for the USD Index to trade at a multi-week low and for the carry trade to break to a multi-week high. We wait with baited breath!

    Disclosure: I am Long DBV, TBT, SLV, GCC, DGS, UDN, TBT.
    Dec 06 12:04 AM | Link | Comment!
  • The Yen Is Getting Ready to Breakdown
    For quite sometime we have been rather puzzeled as to why the yen crosses (the AUDJPY NZDJPY etc) have not recovered when markets which the yen crosses have historically been highly correlated with (such as emerging market equities, the CRB, US 30yr yields, and high yield corporate bonds) have recovered most if not all of their post flash-crash losses. We think that if the current up trend in equities, treasury yields, and commodities continues it is just a matter of time before the Yen breaks down against the crosses. Of course this begs the question as to whether or not equities, commodities, and US treasury yields will maintain their current up trends. We think that they will for reasons that we have discussed on numerous posts over the last few months.

    In any event in order to help us with what is really happening with the JPY we have developed our own proprietary Japanese Yen Index which is comprised of 10 currencies relative to the Yen with each cross being equally weighted, it is part of our Underneath the Radar series of indices. In essence we try to look at markets in ways which no one else looks at them.

    Note just how close this index is to breaking to a multi-week high. A breakout would confirm our fundamental bearish view on the Yen. With a quickly ageing population and a massive government debt (suggesting that the cost of servicing that debt will become the responcibility of fewer and fewer workers over the coming years). 
    Japanese Yen Index
    A lot of our analysis is based on inter-market relationships. In essence we look for confirmation in the behaviour of one market with another.Over the last two years we have noticed that the Nikkei has had a respectable record of leading the yen crosses. We cannot help but notice that the Nikkei has recently broken out of its trading range. Will the Yen follow? Well we see little reason why not.
    Nikkei 225


    Disclosure: Long DBV AUDJPY Calls
    Tags: Japanese Yen
    Nov 19 12:04 AM | Link | Comment!
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