August 1, 2013

Logical Market Update: Morgan Stanley’s Selling What? NYSE Margin Debt & S&P 500 All Time Highs

Second Verse Same As the First: Morgan Stanley Pushing Non-Prime Fund to European Investors – NYSE Margin Debt and S&P 500 All Time Highs

To say that people learn from their mistakes is a fabrication.  Seems that several of the TBTF banks have decided to repackage their sub-prime mortgages and ship them off to Europe to offer yield hungry investors a chance to buy in.  Morgan’s latest fund was launched in December 2012 and by the end of June 2013 had $286.5 million invested.  The fund manager aims to pump up the volume to a total of $1 billion building on the investment case that buying non-agency RMBS (sub-prime) because the fundamentals in the U.S. housing market are strong enough to overcome any bad feelings Eurozone investors have from being burned that last time this bubble burst in 2007.  The rational being pumped out by MS is incredible and strongly confirms my suspicions that the housing market has again reached a top.  It may take some time before the majority catches on but if history has anything to say, it will be far too late and many will again get burned.  I wonder how many puts MS and other TBTF banks are buying as they bet on another bubble bursting. 


Balance the above against the fact that Eurozone securitizations placed publicly during the first half of 2013 sank nearly 30% over the same period in 2012.  No wonder MS believes they have a high chance of peddling the good faith and credit of the U.S. to Eurozone investors who don’t believe in the good faith and credit of the Eurozone!  What a tangled web they weave.  Remember, there is so much more risks to be off loaded if the TBTF banks are to continue making huge quarterly trading profits. 


Add in to this the huge problem of underfunded public employee pension and benefit plans that will begin to bring down many more municipalities.  Detroit’s bankruptcy filing is by no means the lone standout amongst the many across the country that are attempting to deal with underfunded plans.  Several states have made huge promises over the years and now that it is time to pay the piper are screaming foul.  This is a fact and will ultimately lead to the collapse of many more U.S. cities, counties, and states.  Bankruptcy lawyers stand to make a fortune. 


A simple fact is that a small uptick in interest rates by the FED would likely be enough to turn the tide.  Consider how much money has been poured into instruments that are designed to increase in yield as interest rates fell.  Seems like the smart thing to do right – borrow funds at 3% and generate a 6% return.  Leveraging to the max was not only prudent but continues to be the trade.  Problem is the folks making the trade are not trading their own money.  They are trading public money and doing it at record low rates. 


Should the Federal Reserve raise short-term interest rates by 0.25% liquidity would disappear which would increase margin requirements (yes, all that money put into the investments is borrowed) and more than likely force several liquidations at huge losses.  Important points to remember the investments were not bad, what will destroy investors, are the leverage levels.  Which brings me to my next point.


Anybody checked the NYSE margin numbers lately?  I know most people don’t talk about it, but the reality is that most of the buying taking place at record high levels is done on margin.  In fact NYSE margin debt is again at all time highs.  So as the markets rally to new highs investors are more leveraged than at any other time in history.  Greater than in 2000 and 2007 – let’s take a look at what happened then.


In March 2000, margin debt on the NYSE reached above $278 million setting a new record at that time, then it began to fall.  A few months later the S&P 500 reached above 1500 and promptly proceeded to loose 45% of its value over the next two years. 


In July 2007, NYSE margin debt set a new all time high above $381 million, before turning lower.  Within two months the S&P 500 reached a new all time high at 1550 before dropping over 60% of it’s value over the next eighteen months. 


In April 2013 NYSE margin debt again set a new all time high above $384 million and has turned lower.  During the next three months the S&P 500 has moved to new all time highs several times reaching above 1700 on Wednesday. 


If history has any to say about what is coming next – look out below. 


I am continuing to include the graph of the Federal Reserve’s outright holdings. This chart needs no additional explanation and is included to keep in perspective who has the motivation to keep it all going.




The broader indexes again moved to new all time highs for the DJIA and S&P 500 with the Russell almost there and the NDX adding to its string over new recovery highs.  Bonds resumed the declines with yields advancing – the Euro resumed its decline as the Dollar rallied.  The basis for the rallies was pinned on the better than expected drop in initial unemployment claims to five and a half year lows.  Does anybody else see the irony in this?  The FED has made clear that one of the criteria for to cut back on purchases would be a drop in the unemployment rate.  Ok – sounds clear to me – and the bond market took that to heart on Thursday dropping over a point signaling a strong belief in interest rates going up.  The dollar responded by rallying which falls in line with expectations.  Now, the equity markets seem to be in a world all their own and are holding on to what the FED comments stated yesterday – that the FED will continue to hold rates at current levels into 2014.  Now that is putting all your eggs into one basket labeled the good faith and credit of the U.S. Federal Reserve.  I’m not sure what to say about that.  Let’s see what happens tomorrow after the release of the July jobs numbers.


Technically, the broader markets remain extremely overbought and now that additional resistance levels have been reached the probability for a period of correction and consolidation has gone up substantially. 


The 30 – year bond dropped close to two points with the 10 – year note dropping over a point.  Support at 132’10 in the 30-year bond held with a breach occurring late in the session.  The 10-year note is likely to follow suit with a drop to support at 123’30 to 123’11. 


The Precious Metals held to tight ranges today wrapped around unchanged.  The equivalent ETF’s though (GLD and SLV) dropped harder.  Nothing has changed here gold would need to break below 1300 and silver below 19 before the probability for another test of downside support would be in the near term picture.  Thus far, the market continues to signal that the lows are in. 


The Euro touched the 1.32 support level before bouncing slightly higher into the U.S. close.  The failure of yesterday’s rally gives strong support to the decline dropping to support at 128. 



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  • Automatically reads all of your DTS entries and exits
  • Calculates the profit/loss of each trade
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The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 


My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.


The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    In the near future I will be adding options strategies to the trading list. 


Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:


  • DJIA future (e-mini available) – highly recommended for experienced traders
  • S&P-500 future (e-mini available) – highly recommended large intraday moves.
  • Russell 2000 future (e-mini available) – highly recommended can lead in either direction.
  • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
  • US$/Euro futures (e-mini available) – very highly recommended – easy to trade afterhours as well.
  • V (Visa) – stock and options – recommended – large swings in both direction likely
  • MA (MasterCard) stock and options – recommended – $600 stock – large swings likely
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – highly recommended – Options trading as well
  • GOOG (Google) – highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended 
  • 30-yr Treasury Bond future – highly recommended
  • 10-yr Treasury Note future – solid two way trade
  • TLT (Treasury Bond Long ETF) – very active
  • TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
  • Gold (futures and ETF – GLD) very active – not suitable for all traders
  • Silver (futures and ETF – SLV) – very active – not suitable for all traders
  • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes