A quick trade recap before we start:
Last week's recommendation to buy CALL options on the PowerShares Deutsche Bank U.S. Dollar Bullish Fund (NYSE:UUP) is now up 19%. We're suggesting you hold the trade for the time being. We bought the January 2013 expiry so we've plenty of time value to play, and, moreover, we feel it's time to go with the buck for a while. Here's the way the weekly UUP dollar chart looks:
For the past two years, UUP has climbed with every surge in weekly volume (see red annotations, above). As you can see, volume from two weeks ago came in at the highest level in the fund's history, a combination of massive short covering and new bullish positions being taken on, a full 3x the weekly average volume. We say that's bullish.
Not shown above, but evident on the daily chart, are a number of additional dollar-bullish technicals. Have a look here:
The daily chart shows RSI in bullish territory above its 'waterline', with MACD rising strongly behind. If and when both are situated above their respective mid-point waterlines, the dollar should be moving confidently higher.
See also the convincing drive above both the downsloping trendline (in red) and the short term moving average, an indicator of strength for the next two to three weeks minimum, in our view.
This Week in Purgatory
Yes, the economy looks like hell. Any objective observer could tell you that. The following is what's contributing to one of the ugliest macro pictures we've seen in decades:
- Rising interest rates – particularly in emerging markets, but coming eventually to a western nation near you.
- Japanese disasters – global supply chains have been disrupted by Japan's tragic event trio (earthquake, tsunami and nuclear calamity), that dealt a severe blow to the country's manufacturing sector. It's far too early to tell when all lines will be up and running as before.
- Flagging U.S. housing market –it looks like we're about to go from bad to worse. Any rise in interest rates will certainly put a nail in the national home buying coffin, but in the meantime, there's very little activity in an already depressed sector. Case-Shiller (see below) indicates prices still sliding, National Home Builders Index at a two year low and sales numbers remain depressed.
April Housing Starts will be announced Tuesday morning.
- $100 Oil – this will no doubt cool global growth.
- Austerity – already part of the European and U.S. State government equation, and now about to be implemented by the Feds. Could cut into growth. Sure, but how deeply?
- Corporate earnings slowing –after the solid year-over-year growth of the last two years, driven largely by cost cutting and other operational efficiencies, earnings are slowing. We're now looking at the worst numbers for the last five quarters. Is it the start of a trend or an exception?
The corporate 'beat rate' is also at its worst levels of the current bull market, very possibly because all efficiencies have now been wrung out of workers and systems.
So we go short, right?
Not so fast, swifty. We bring you the bad news because we've now seen enough of it to know that it doesn't make a great deal of difference in the face of a Mississippi juggernaut wave of liquidity that continues to move unrelentingly into the global monetary base. What the bad news does do is keep nervous hands off the bid for equities. And that's fine with us.
Since new highs were achieved on the major market averages, we've turned bullish, and so we remain. Which does not mean, of course, that we won't see any stock weakness over the next week or two; it's still very possible. We've left several shorter term option trades open for that express eventuality. If there's a pullback, we expect it to be deep, swift and scary, forcing the ninnies out of the game and giving us a number of winning trades. Thereafter, we also expect the market to grind its way to new highs.
Finally, we're of the opinion that it's next to impossible to determine the direction oil will trend over the near term. There are just too many intangibles, including the ongoing upheavals in the Arab world, floods and tornadoes in the U.S. Midwest, the likelihood of more natural disasters the world over, and the determination of speculators to drive the price of crude higher.
Make no mistake: oil is critical to the rate of global economic growth and, by extension, the plight of markets. We see the potential for sustained volatility in the energy sector – of the sort we witnessed last week, with 10% daily moves as traders search for the next intermediate trend. And our aim is to exploit that volatility.
We're doing it like this:
We're not going to trade oil itself. We're going into a closely related commodity – coal.
We're doing it for several reasons.
1. Coal miners, as a group, have seen even more exaggerated moves than most companies in the energy complex.
2. The supply/demand picture for coal, though complex, is somewhat easier to project than that of crude oil, with all its attendant geopolitical vagaries.
3. There are several options strategies that avail themselves at this juncture that we feel could prove immensely profitable.
That said, here's coal for roughly the last two and a half years:
The current price action for coal is situated about midway between the trend channel lines that have prevailed for the last two and a half years, and the gain for the period was in the neighborhood of 25%.
Now have a look at the Market Vectors Coal ETF (NYSE:KOL) plotted against one of the industry laggards, Arch Coal (NYSE:ACI), over the same two and a half year time frame:
