INVESTMENT EDGE
It looks as if the Greece saga has once again grabbed the attention of market participants. Until this is moved off the "uncertainty" list I think there is little chance to move higher. The link below will take you to my latest June market recap video.
I had another post written for today on a completely different topic but considering Monday’s unprecedented move I thought it would be worthwhile addressing that instead as it likely has some readers nervous. The DJ Industrials fell over 2% as the drama of a Greek exit from the Euro (Grexit) reached a crescendo and launched investor’s fears into overdrive. Price stopped just under the 200dma and right at prior (S1) support. Volume was elevated, but surprisingly low for such a dramatic move.
From Jani Ziedin @ TheCrackedMarket
No doubt the holiday-shortened week contributed to this slower than expected volume. Of course it would be more accurate to state it the other way; our slower than normal week contributed to this outsized volatility. When big money is on vacation, markets are often less stable, especially when spooky headlines get involved.
Two-weeks ago we traded near all-time highs when many investors assumed a Greek compromise was all but signed. This week we crashed to the lowest levels since winter as investors assume the Grexit is all but assured. This is a great example of why smart money trades against the herd. When everyone assumes the deal is done, then it is priced in and there is little upside remaining. That is the perfect opportunity to take profits and wait for the inevitable problems to arise.
Let’s get one thing straight, the Grexit is a non-issue for anyone not living and working in Greece. Our financial system had five years to manage, hedge, and otherwise reduce exposure to a Greek default. Most Greek debt is now held by European governments who can weather these losses. For them it isn’t a big deal because they didn’t enter into these positions expecting a profit, or even their money back. All they were doing is buying stability and time. And given that they delayed the inevitable Greek default by five years, they did a pretty good job. While a few politicians might lose their jobs and damage their legacy over this, the financial system will survive without Greece because of the time they bought us.
This may sound strange but corrections like we experienced Monday are not what should be focused on. Instead what is most important is what happens afterwards. As a general rule if the market cannot take back at least 50% of a big down move higher in the following 2-3 days (the fewer the better), it is likely you will be in for further downside. Further downside finds S2 (17000) is the likely target if that were to occur. If the markets want to really sell off, a reasonable low end target comes in at S3 (16000). Considering the current seasonality it is my expectation it is unlikely we will see a major sell off without participation by the big money (major institutional managers) who have started their vacation season and don’t return until September. With that in mind does it really shock anyone that the worst market month for stocks is September?
In the meantime the Greece debacle is not fixed, and closer to home we have our own “Greece” going on right here with what is happening in Puerto Rico. Normally summers are boring for market followers. Watching paint dry is typically more exciting but with the backdrop of these two developing saga’s I would recommend investors stay especially vigilant.
If you read my past posts you are familiar with my continual reference to muted daily volatility. The days of panicky buying or selling have been absent from the U.S. stock market so far this entire year. I have lots of ideas why, but that will be left for another day.
The Standard & Poor’s 500 Index hasn’t posted a gain or loss of 2 percent or more for 128 days, the longest streak since one ending in February 2007, according to data compiled by Bloomberg and Deutsche Bank AG. The last time the gauge went without a 2 percent move in the first half of the year was in 2005.
The last time U.S. stocks closed up or down more than 2 percent was on Dec. 18, last year when the S&P 500 climbed 2.4 percent. That week, Fed Chair Janet Yellen said the central bank is likely to hold rates near zero at least through the first quarter, sparking the biggest three-day surge in global equities in two and a half years.
The number of days when the S&P 500 rose or fell more than 2 percent (on a closing basis)
Investors waiting for big equity swings may be out of luck until September, with the Fed hinting they are not likely to raise rates until then, their first in nine years. Low volatility in this catalyst-heavy June is likely to be followed by more low realized volatility in the catalyst-light July and August if the Greece situation passes without contagion. If not, get prepared.
After tripling between March 2009 and the end of last year, the S&P 500 is up just over 3% since then. This has had the effect of creating the longest consolidation in the SP500 with a 4.6% range since 1950.
Long consolidation periods in stock indexes are typically bullish patterns that eventually resolve higher. Where they tend to fail though is when they form at the top of a trend (something that is only known in hindsight) which is where we are now. Now is not the time to be lulled into complacency as that is usually when the market decides to shake things up. Invest Safe!
For something a little different -
After years of use in other countries around the world, chip-enabled credit cards are coming to the USA. Credit cards with only magnetic strips are being phased out ahead of an October 1, 2015 deadline.
If you have a credit card, you’ll probably get a replacement with a chip at some point soon if you have not already. The entire country won’t switch to chip cards by October 1, but retailers and banks that don’t will assume more financial liability.
How to Use a Chip Card
To use a chip-enabled credit card, you insert it in the bottom of a payment terminal and leave it there for the duration of the transaction. Importantly, the card needs to remain in the reader until the transaction finishes, not swiped like a magnetic strip.
While you’ll encounter payment terminals with support for both the magnetic strip and chip on modern credit cards, you can’t necessarily just use the magnetic strip. Try to swipe a chip-enabled card on such terminals and you’ll probably be asked to insert the card and pay via the chip method.
EMV Card Basics
Credit cards with chips use the EMV standard, which stands for “Europay, Mastercard, and Visa.” EMV is a global standard allowing chip cards to interoperate at point-of-sale systems and automated banking machines. (Despite the name, American Express and Discover are also participating.)
Know that the old magnetic strip isn’t going anywhere anytime soon. A chip-enabled credit card has an EMV chip as well as a magnetic strip. If you ever find yourself somewhere that only accepts magnetic strips — either in the USA or elsewhere in the world — you’ll still be able to use your card.
The magnetic strip can easily be cloned by swiping it, and that magnetic strip data can be copied to another card and used to make fraudulent purchases. A chip card works differently — it has a small computer chip in it. When the chip card is inserted into a payment terminal, it creates a one-time transaction code that can only be used once. In other words, chips can’t be duplicated as easily as magnetic strips. Any payment details would be stored with the one-time code. If the USA had transitioned to chip cards earlier, the disastrous Target breach could have likely been averted.
The October 1 Liability Shift
US banks have been issuing chip cards over the past year ahead of an October 1, 2015 deadline. After this date, a “liability shift” will take place. Any retailers that choose to accept payments made via a chip card’s magnetic strip can continue doing so, but they’ll accept liability for any fraudulent purchases. Any credit card issuers that don’t issue EMV credit cards will be on the hook for any fraudulent purchases, too.
In effect, Visa and Mastercard are telling banks and retailers that they can continue using the old system at their own financial risk. Not everyone will be transitioned over by October 1, but everyone who hasn’t will assume additional liability — that will encourage them to migrate as soon as possible.
This doesn’t affect your own personal liability — if your bank doesn’t issue you a credit card with a PIN before October 1, they’re assuming liability. That’s their problem, not yours. These details are all between retailers, banks, Visa, and Mastercard. But they explain why chip cards are getting rolled out so quickly.
EMV Cards Don’t Eliminate Fraud
Chip cards don’t eliminate the problem of fraud. In particular, these cards still have numbers, expiry dates, and three-digit codes on their backs. Someone could copy this information and use it to make purchases online. A chip-and-signature card could be used at a point-of-sale terminal along with a forged signature. The magnetic strip can still be used in the old way at many terminals around the world.
But, although chip cards won’t eliminate all fraud, they will make fraud more difficult. This will also help prevent future breaches of payment systems — like the one that happened at Target — from being so damaging.
Just to be clear and insure I don’t lose anyone just because of the title, this blog post is not about the rapper, Notorious B.I.G but instead, small cap stocks. While it is not a perfect indicator (but hey, what is?), watching what the small cap stocks are doing provides a very good insight into the stock market as it speaks to investor’s willingness to take risk. During times of optimism and market strength small cap stocks will outperform their bigger brethren. On the flip side when small caps are lagging that portends to a potentially bleaker outcome and investors should sit up and take notice.
Below is a chart of the US small cap stock index, IWM. In the upper pane is a momentum indicator RSI. In the middle is the price and the very bottom pane is the ratio of small cap stocks to the larger SP500 index. Since their first peak in the 1st quarter of last year (on their first touch of S1) you can see small cap stocks have been consolidating going nowhere for almost an entire year and under-performing the SP500. You can also notice at that time how far away price had gotten away from the blue uptrend line so a reversion to the mean back to that line should have been expected. The question as we consolidated was “is this just a normal, well deserved rest or something more?” For me, if price broke both S2 and the blue uptrend line that would have told us the answer to our question as it would have been an indication we were in for something much more. Instead, and right on queue price bounced exactly right off both support lines (red horizontal and blue uptrend) and we have not looked back since. Not surprisingly that "bounce" turned out to be the weekly low. Price eventually broke above S1, back tested it once and moved on to all-time highs. In the bottom pane you can see that since that weekly bottom print, small cap stocks have been on a tear outperforming the broader SP500 index by almost 10%.
While event and seasonality driven corrections are always on the radar especially in today’s crazy geopolitical environment, this is a very bullish sign and combined with follow through in the coming week would go a long way towards alleviating much of my concerns we have reached the end of this bull market … at least for now.
Have a wonderful Father's Day!
