What is a lim report
July 2015 In Review, August Preview
at August 2, 2015
July started with a quick vacation-cum-business trip-cum-catch up with friends in Perth, Australia. Many thanks to Rom and Raph for entertaining us and having us over to their homes for dinner with their families. How time has flown. We were once our kids’ ages and messing up our lives. Now look at us – parents, guiding our kids to not do the shit we did. I have to say that we haven’t done that badly considering what rascals we were. Thanks for having Lucy and me over, bros.
Not much else happened in July 2015 worth noting. Most of my time was spent watching a most interesting global development that skewed the markets to and fro. So let’s get to the action.
2015 has seen the most fickle U.S. market in history having swung the DOW between gains and losses 21 times in seven months. This surpasses the record of 20 swings in 1934 and 1994. It comes as no surprise because I wrote about it at the end of January this year;
“Let’s recap some of those foreboding prophecies we mentioned last month … no sell-off in May 2014, terrible Black Friday numbers, no Santa Claus Rally … the updates from January are that the first day was down, the second day was also down (which is extremely rare), the first five days didn’t give us a gain and the January Barometer is bearish – all signs that 2015 is likely to be more bearish than bullish.”
At the end of March, the December Low indicator was divergent from the January Barometer, warning us that the rest of 2015 would either be extremely volatile or very flat. Seems we got the latter.
As of the close of Friday 31 July 2015, the DOW is negative for the year and below its 200DSMA. Earnings have been a mixed bag of results with hits and misses evenly across the broader market. Revenues, however, have faltered further. Guidance is almost non-existent as most companies kept their outlooks close to their chest.
The market’s reaction to earnings has broadly been dovish because of “better than expected” numbers. However, those number have mostly been downward revisions when compared YonY and QonQ. The reality is that the market is not doing as well as the benchmark indices are suggesting.
A quick look at the Transportation index (above, bottom) will give you an idea of what the Dow (above, top), NASDAQ and S&P should actually look like if all things were equal and not manipulated.
The $TRAN has spent all but five sessions in the red for the year and has been well under its 200DSMA since 18 May. Such price divergences between the benchmarks and the $TRAN has more often than not, swung in favor of the $TRAN in the longer term as was the case at the top of the sub-prime bubble.
Yields have fallen across the board in July. Spreads between the 5/10 and 10/30 have tightened to 66bps and 72bps.
With only a couple of weeks left for earnings season, I doubt very much that the remaining big names can make a difference for the coming months of August and September.
And they are going to be very rough months.
Singapore’s economy fell into a technical recession when growth fell to -4.6% in Q2 on the back of weak manufacturing. Earnings amongst the big three banks have been underwhelming with UOB announcing a 5.7% YonY drop in profits.
The STI (3,202.50) closed out the month with its two worst consecutive sessions since 2011.
The KLCI (1,723.14) fared no better under the weight of the 1MDB scandal and a weak Ringgit. Both KLCI and STI are in the red for the year since the end of May and under their respective 200DSMAs.
Amongst regional currencies, for the first time since 2008, the AUD fell below the SGD in July 2015. It closed out the month at 1.0025. The SGD saw some weakness against the Ringgit in July. It started the month well hitting a high of 2.8296 on 7 July only to close the month out at 2.7861.
Elsewhere, The Chinese market saw its worst drop since 2007 on Monday 27 July 2015, losing 8.4% in a single session. From our last report when the Shanghai Composite close out June at 4277.22, the Chinese benchmark fell a further 613 points or -16.73% to close July at 3664.01. This is in spite of the PBOC
throwing trillions of Yuan at the market and placing a selling ban across all the major shareholders.
As long as the language in any market is not bearish amongst the big players, this is reason to be extremely cautious. It won’t be until these players are speaking about doom and gloom that I will consider being bullish on risk again.
Till then, I will be watching the yield curve closely and monitoring the economic health of the U.S. China, Australia, Malaysia and Singapore with great interest. Given that we’re going into the two most bearish months of the year, the strength of the Asian economies are going to be severely tested.
One equation I didn’t bother to consider is the Greek issue because I strongly believe that it will continue to be a non-event regardless of what happens to that debt-ridden country.
August 2015 Preview
August has been the most bearish in the last 28 years with no reliable patterns. It is the first of two consecutive months of bearishness going into September, the most bearish month of the year over the last 80-plus years. Since 1987, August has been the worst month on the DOW, S&P and NASDAQ.
August 2015 has 21 full trading sessions and no public holiday.
- August starts in reliably weak fashion
- The first trading day of the month has seen the DOW go down 11 of the last 17
- The Russell 200 has been up 7 of the last 10 on the first trading day.
- The first nine days of August are the weakest first days of any month.
- The start of the second week continues to be weak
- The Friday of the second week is reliably bullish.
- Expiration Week of August is its most bullish week.
- The Monday before August Expiration has been up on the DOW 12 of the last 19.
- August Expiration Friday (21) has been bullish with the DOW up 8 of the last 11.
- The week after Expiration Friday is bullish but not as bullish as week three.
- The Monday after Expiration Friday is reliably bullish.
- August traditionally ends poorly but has been ending stronger in the last 10 years.
- The second-last trading day of August (Friday 28) has been down on the S&P 14 of the last 18.
Key Economic Dates For August 2015
This is going to be a busy month for Central Banks all over the world. With economies contracting and making hawkish forecasts, expect more volatility in the markets and more job lay offs as companies tighten their belts.
- Manufacturing PMI for US, UK, most of Europe
- G8 Meetings
- Australia RBA Rate Statement
- Services PMI for US, UK, most of Europe
- US ADP Employment Change
- US ISM Non-Manufacturing PMI
- Jackson Hole Symposium Day 3
- US Consumer Confidence
- UK GDP Second Estimate
- Europe M3 Money Supply y/y
- US Prelim GDP q/q
- US Chicago PMI
- China Non-Manufacturing PMI, Manufacturing PMI
Oil fell from 60.00p/b to 46.00, Gold dropped from 1,180.00 to 1,095.00, Corn collapsed from 450.00 to 380.00 … commodities across the board took a beating in July with sugar, gold and copper making new multi-year lows.
- Crude tends to weaken late in August
- Nat Gas tends to show strength
- Gold and Silver strengthens in August
- Copper stays weak
- Soya and Corn are also weak in August but Corn tends to have counter-rallies depending on the weather
- Wheat maintains its strength
- Cocoa gets very volatile
- Coffee bottoms in early August and reverses upward by mid month
- Sugar stays low in August.
With Fed Chair Janet Yellen holding rates unchanged at the end of July, this sets up a strong possibility of higher rates by September.
Whatever happens between now and then, I will have my money in commodities as everything else has gotten really troublesome to trade. Its not that commodities is easy but its the least troublesome with very little headlines to create the kind of wildness that the currency and equity markets are seeing now. Plus, they are at their cheapest levels in a long time.Source: www.conradalvinlim.com