Wednesday, November 28, 2007

Stocks May Revive as Funds Exit Bonds

by Alex Roslin
Wednesday, November 28, 2007
[original article]

Monday saw a stunning move in the U.S. Treasury market that had a lot of folks paying close attention. The benchmark 10-year Treasury yield, which sets the course for everything from mortgage rates to car and business loans, declined from above 4.025 percent to close the day at 3.85, an astonishing drop of over 4 percent.

That’s the kind of selloff we usually see in a volatile sector like gold or crude oil—not go-slow bonds. The decline capped a four-month fall in the 10-year yield from above 5.2 percent that started in the midst of the subprime meltdown last summer.

Meanwhile, bond prices, which trade opposite to the yield, have catapulted up, up and away. All this has been great for bondholders and, potentially, for reviving the markets and economy, as falling interest rates are wont to do. But it also signals the market’s deep preoccupation with the weakness provoked by the housing disaster, which caused a lot of money to flow out of stocks and into safe-haven bonds.

Now there comes a sign of a possible new direction for the bond market, which could in turn have big impacts on stocks and commodities. The latest Commitments of Traders report issued by the U.S. Commodity Futures Trading Commission suggests that small traders in the 10-year Treasury note have hit the brakes and suddenly ramped up their net short position in 10-year futures and options. (The 10-year Treasury is tradable with iShares Lehman 7-10 Year Treasury (IEF) and SPDR Lehman Intermediate Term Treasury (ITE).)

I’ve developed a trading setup based on following what the small traders are doing in the Treasury market. Historically, they tend to be correctly positioned at tops and bottoms in the 10-year yield. (I know it’s strange. Normally, the small traders are considered to be the “dumb money.” But my research has found that’s not true in every market!)

My trading signal flipped to bullish with the July 31 COTs report, but it has now just flipped back to bearish with the latest COTs report issued Monday, Nov. 26. This means the “smart money” believes the 10-year yield has bottomed and will now start climbing again. (That’s bearish for the Treasury note’s price.)

Meanwhile, all my other Treasuries trading setups based on the Commitments of Traders reports remain in bullish mode. That includes the entire yield curve, from the 30-year Treasury bond (tradable with iShares Lehman 20+ Year Treasury (TLT) or the SPDR Lehman Long Term Treasury (TLO)) on down to the 30-day Fed Funds contract (tradable with SPDR Lehman 1-3 Month T-Bill (BIL)).

So what does this all mean? I think the overall COTs data suggests that interest rates may not decline much further at this point (and that bond prices may soon top).

It could be a sign that money will start to flow out of high-flying bonds and back into stocks and commodities—and that the markets generally believe things are looking up.

A confirming sign of that comes from my COTs U.S. Composite Equity Index, which is based on the COTs data for the S&P 500, NASDAQ 100, Russell 2000 and Dow Jones industrials. The latest COTs report issued Nov. 26 has moved this index up smartly to 0.62, from the previous week’s 0.04. The index has been on a bullish signal since March 27, but it turned decidedly down in late September, warning of coming market trouble.

Now, it’s revived nicely and has given me a renewed bullish signal for my trading setup for the S&P 500 (tradable with S&P 500 SPDR (SPY), S&P 500 iShares (IVV) or the 200-percent leveraged Ultra ProShares S&P 500 Fund (SSO)).

Tuesday, November 27, 2007

Was Gisele Bundchen Right to Sell the Buck?

by Alex Roslin
Tuesday, Nov. 27, 2007
[original article, with table]

Anyone hoping for some market resolution last week had to be pretty disappointed. Gold mounted a spirited comeback, but gold stocks and silver looked pretty sickly, despite the U.S. dollar’s continuing smashup derby. Meanwhile, copper got its head caved in and finished the week off 20 percent since early October.

So is the shine off bullion and other commodities? Is there some kind of warning sign here for the broader economy? Why can’t the market make up its mind? And perhaps most importantly, was supermodel Gisele Bundchen right to say she didn’t want to get paid in U.S. dollars anymore, or was that actually a sign of a bottom? Or put another way: is Gisele with the “smart money” crowd or the dumb?

I think we can get some interesting answers from the latest Commitments of Traders report. (This is the data on trillions of dollars of futures and options holdings in 100 major markets issued free each week by the U.S. Commodity Futures Trading Commission.)

My overall take: the data may have been signaling a pause in a longer-term bullion bull run. Three of my gold-related trading setups based on the COTs data (for gold itself, the HUI Gold Bugs Index and USERX U.S. Gold Fund) flipped to bearish in the Sept. 25 COTs report. This was based on trading on the same side as the “smart money” commercial traders, who had turned mega-bearish. The commercials have adopted a decidedly neutral stance in the latest COTs report—neither bullish nor bearish. (See the table in my story at for the specifics.) So that means my existing signals still hold.

However, my setups for the XGD Canadian Gold iShares ETF and silver—based on fading the “dumb money” small traders—have remained bullish throughout this rough patch. (XGD flipped to bullish in May, and silver went bullish in July.)

In the latest COTs report, the gold small traders are still quite bearish—signaling more potential upside for XGD. Meanwhile, the silver small traders have slightly increased their net long position as a percentage of the total open interest and are now simply neutral. Since neither group of traders has yet gone to a bullish extreme in its positioning, I’m still far from getting a bearish signal in these two setups.

Meanwhile, in copper, which has pretty much collapsed in price, punching below its August low, the “dumb money” large speculators have again increased their net short position. It’s the fifth straight week of growing bearishness in their positioning since they gave a sequence of three renewed bearish signals starting with the Sept. 25 COTs report. Those bearish signals were based on the large specs getting super-exuberant about copper’s prospects. Oops!

Now, these geniuses have just moved to what I’d call a bearish tilt in their net positioning. As you can see in the table here, their position has fallen below the moving average I use for this setup. This means in effect that the setup now has what I’d call a bullish tilt because the large specs are getting increasingly bearish. We’ll see if the setup continues in that direction. It could be setting up for an eventual bottom in copper. But we’re still far from that point right now, so my existing bearish signal still holds.

And since copper is often seen as a barometer for the broader economy, the setup’s continued bearish signal obviously isn’t a very happy sign. You’d probably want to see copper stop getting cleavered before you could feel good about the economy again.

So what of the poor, unloved, beat-up old U.S. dollar? you ask. It’s definitely not looking good when a supermodel snubs you in front of the whole world. Turns out Gisele Bundchen was really onto something. Looks and smarts. The latest COTs report makes it eight straight weeks that the commercial traders have reduced their net U.S. dollar index futures position. My U.S. dollar setup has been on a bearish signal since Oct. 2006, and here—at the point where some people say a bottom for the greenback is at hand—there’s nothing on the COTs horizon to suggest that’s true. If anything, it’s more public humiliation from supermodels ahead.

For more details and signals from my setups for equities, energy, the Treasuries, currencies and agriculture, visit my free blog Good luck this week.

Wednesday, November 21, 2007

Fed and Yields Headed Down

by Alex Roslin
November 21, 2007
[original story]

Monday, November 12, 2007

Don’t Bank on These Shares for Awhile


Shares of financial stocks have been hobbled and could get a whole lot cheaper

Alex Roslin
The Montreal Gazette
Monday, November 12, 2007

[Click on chart to enlarge.]

How the mighty banks have fallen. As visions of subprime meltdowns dance in investors’ heads, shares of Canada’s once-mighty banks have been hobbled, while the U.S. financial sector is in an open rout.

The widely watched KBW Bank Index, a basket of leading
U.S. banks, is in a freefall, plummeting 23 per cent since its peak last February and shooting down to almost pierce its low of 2005.

That qualifies U.S. banks as being in a bear market, usually described as a 20-percent price drop.

Even here in Canada, which so far has escaped largely unscathed from the U.S. real-estate crack-up, the benchmark S&P/TSX Financial Index peaked back in May and is down six percent.

The average Canadian bank stock is now at the same value as it was 12 months ago.

It’s all quite mystifying for a sector that has been powering steadily up ever since 2000, suffering nary a hiccup even during the 2000-02 dot-com crash.

Back in those frightful times, while the high-flying tech stocks of the Nasdaq index crumpled, shares of the Royal Bank of Canada, for example, took off from around $13.30 in January 2000 to peak at more than $60 last May. (They’ve since drooped to below $52 as of last week.)

Meanwhile, the Nasdaq, despite its remarkable recovery since 2002, is still nearly 50 per cent below its 2000 high.

But just when it seemed like nothing could thwart bank shares in their ascent, along came the U.S. housing disaster, which has left many banks facing their own stock disasters. Is there any hope now for a turn in the tide?

Probably not yet, say some market chart experts.

“There are definitely major weaknesses in that area,” said Ron Meisels, president of Montreal-based market-analysis firm P&C Holdings and a founder the Canadian Society of Technical Analysts. (Technical analysis is the study of market charts to spot price trends.)

Meisels called the performance of U.S. banks “an absolute disaster. It seems the market is telling us there are still some problems that are not yet announced. The important thing is we’re not aware of the total cost of the real-estate writedowns to the banks.”

Meisels said many long-term investors are hesitant to dump bank stocks because, in past selloffs, they’ve always eventually recovered. He said that’s a reasonable argument, but he advised closely watching a security’s 200-day moving average.

(Charts of stocks and indexes, including moving averages, can be generated at various free websites, including Yahoo! Finance and

If the price falls decisively below the 200-day average, that’s a bad sign, he said. The S&P/TSX Financial Index has seesawed below and above that line since last July.

Especially important, he said, is whether the 200-day average is sloping upward or downward. While the TSX financial index is still pointed up, three of the big six Canadian banks have seen their 200-day averages go flat in the past one or two months, while those of the Bank of Montreal and National Bank have been in an outright decline since August.

“It’s a bad situation,” said Mark McClellan, a bond analyst with Montreal-based BCA Research who used to work for the Bank of Canada.

McClellan believes credit-rating agencies “are still early” in the process of re-evaluating bank balance sheets to account for poor-quality or defaulted U.S. housing loans.

Even when that process is done, he said, as long as U.S. house prices keep falling, the rating agencies “will have to go back and redo the ratings again.”

All this means that, while bank shares have gotten cheap, they may only be at the beginning of their decline and could get a whole lot cheaper.

“There’s probably more to come. The markets are usually forward-looking, but not this time. There’s no price transparency (to the banks’ real estate debt),” McClellan said.

While U.S. house prices are already down five percent since they peaked in June 2006, according to the S&P/Case Shiller U.S. National Home Price Index, McClellan predicted a further decline of “at least another 10 percent” over several more years.

That jives with a New York Times report in late October that cited economists predicting an additional U.S. house-price drop of 10 to 20 percent, with an eventual $2 to $4 trillion wiped out in real-estate wealth.

The good news in the horror story is the financial sector’s misery is all but certain to prompt more monetary easing from the U.S. Federal Reserve Board and Bank of Canada, McClellan said, which will push interest rates downward for everything from mortgages to car and business loans.

The Bank of Canada, in particular, is also feeling pressure to reduce rates because the soaring Canadian dollar is prompting some retailers to lower prices of U.S. imports, which should cause Canadian inflation to “plunge,” according to a recent research note from BCA Research.

Falling inflation should be good news for Canadian bonds, which would rise in value as interest rates fall, BCA Research said.

Lower inflation and interest rates should eventually also buoy Canadian bank shares, but McClellan said U.S. banks, for their part, are unlikely to end their decline until house prices south of the border have stabilized.

Looking at the charts, Meisels said Canadian banks could see a recovery bounce in coming months, but they’re still likely to underperform the broader market, particularly commodities.

The key level to watch is whether financials manage to surpass their highs of last spring, he said. If they do, Meisels said he would become more bullish on the banks, but he said he doesn’t think that’s likely.

Instead, he predicted the sector will meander up and down for the next two years. And then, he said, look out. Meisels said his research into the history of investing patterns suggests the entire market, including banks, is due for a “big shellacking” in 2010.


Ron Meisels expects the current 40-year market cycle to end in a gruesome bear in 2010 that he believes will last to 2014 and will have similarities with the last such cyclical downturn between 1973 and 1982.

If this gloomy scenario actually unfolds, he said he expects to see a further drop of about 20 percent in bank stocks from today’s levels.

FOR MORE INFORMATION: daily free market brief free charting website

Monday, November 5, 2007

Web Can Help Investors Save

Internet brokerages are forcing mainstream institutions to reduce the fees they charge per trade in an effort to remain competitive


Monday, November 5, 2007
The Montreal Gazette

Twenty years ago, computers were the bane of the investing world when stocks had their worst one-day tumble in North American history during the 1987 market crash.

Computer trading by big institutional firms was widely blamed when the Dow Jones Industrial Average fell 22.6 per cent on Black Monday, Oct. 19, 1987.

Today, computers have dramatically changed investing for ordinary folks, too. You can use one to buy Japanese stocks or Swiss francs from your home without speaking with a live broker.

Do a Google search for investing and you’ll get over 100 million websites. Some of them might even be useful.

And like the computer-driven speculators blamed for the panic of 1987, regular investors can also now run computerized trading programs to buy and sell stocks while they play golf or sip a martini.

The Internet hasn’t only given investors endless info on the markets. It’s also forcing many brokerages to bring down trading commissions and provide more in-house research and market tools like charting and real-time data.

In the U.S. some banks have even started to offer free online trading to larger customers.

Canadian stock brokerages still badly lag the U.S. in bringing down fees, but the advent of super-cheap independent brokerages like Questrade and Interactive Brokers offering fees of under $5 a trade has forced bank-owned brokerages to re-examine their commissions.

A growing number of banks have just started to offer trades for under $10, but so far, the lower fees apply mostly to customers with larger balances of at least $100,000 or to those who trade actively (usually at least 30 times a quarter).

In September, RBC Direct Investor and BMO InvestorLine were the latest institutions to announce fees of $9.95 for a Canadian or U.S. trade to clients with at least $100,000 in holdings.

The $9.95 fee already applied to those doing over 30 trades a quarter at RBC.

Clients with less than $100,000 or fewer trades still must pay $28.95 per trade at RBC, while those wanting to place their order over the phone with a live RBC representative must pay a minimum of $43 per trade plus other possible charges depending on the number of stocks in the transaction and share price.

TD Waterhouse announced a similar fee reduction earlier in September to $9.99 for active and large customers.

“I call it asterix pricing. You better read the fine print before you jump ship and go somewhere else,” said Glenn LaCoste, president of Surviscor, a Toronto-based financial consulting firm that publishes a survey of online discount brokerages.

Despite a lot of publicity for their recent moves, the banks are actually not targeting regular Canadian investors—those executing one or two trades per month, who LaCoste said make up 95 percent of the country’s brokerage accounts—but rather the active traders and large investors who moved accounts to independent brokerages, he said.

“Banks are trying to get into that game to get those people back,” he said.

But the banks’ fee reductions are too little, too late even for many active traders. “To think that the major banks still charge $25 per trade is crazy and a rip-off,” said Matt Caruso, a professional trader in Montreal who switched to Interactive Brokers, where he pays a commission of one cent per share for Canadian stocks and can trade global markets 24 hours a day.

“I honestly feel that anyone who trades at least twice a year and knows how to use a computer should use (an independent discount brokerage).”

Where ordinary folks may eventually benefit, LaCoste said, is from better tools, research and functionality that are being added to online brokerage websites in order to attract active traders and larger accounts.

“The features for the active guys will become mainstream.”

But as for lower commissions for ordinary Canadian investors, LaCoste said you shouldn’t hold your breath.

Online investing isn’t for everyone

Which investors are best-suited to using an online discount brokerage?

People who want their hands held should probably stick to full-service brokerages like those offered by the large banks.

They can provide market advice and help you make a financial plan customized to your needs.

If you feel comfortable making your own investing decisions and like the independence and speed of buying or selling stocks, mutual funds, options and bonds with the click of a mouse, an online discount brokerage may be for you.

Remember: these brokerages have no advisors to help you navigate the markets and are essentially just order-takers that provide a cheaper way of processing transactions.

However, online discount brokerages typically also offer investors an array of in-house research and tools like charts and stock filters.

The large Canadian banks all have online discount brokerage arms, and a number of independent firms offer the service in Canada as well.

One advantage to using a brokerage offered by one of the banks used to be the ease of switching money between banking and investing accounts.

But the proliferation of online financial transactions has made it far easier to move funds between bank accounts and unaffiliated brokerages in recent years.

For some, another concern about independent brokerages is the question of what happens to an investor’s holdings in the case of bankruptcy.

Be sure to verify whether or not the brokerage is a member of the Canadian Investor Protection Fund, which was created by the investment industry to insure losses at member firms and protects investor assets up to $1 million.