Crude Oil bulls don’t want to see selling start here

The last 5-months Crude Oil has experienced a strong rally and has been much stronger than the S&P 500 (gained 27% more), highlighted in the chart below-

CLICK ON CHART TO ENLARGE

This strong rally now has Crude testing what could be an important price zone for one of the worlds most important commodities-

CLICK ON CHART TO ENLARGE

The impressive 5-month rally in Crude is now testing the underside of two channels and its 38% retracement level of the 2013 highs/2016 lows at (2).

Crude is pushing on a very important price zone that bulls so want to see a breakout take place, not selling pressure to start. Smart money traders are betting Crude will head lower, similar to the degree they bet Crude would head lower in 2013/2014.

The Power of the Pattern is of the opinion that what Crude does here, could send an important intermediate message about the future direction of Crude Oil. Bulls would love to see a breakout at (2)!!!

 

Why you see chart pattern analysis with brief commentary:   

There is a ton of news and opinions about markets and stocks that make the decision-making process more difficult than it needs to be.    

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Why The World's Billionaire Investors Buy Precious Metals

There are always lessons that can be learned from the “smart money”. Unlike regular investors, Visual Capitalist"s Jeff Desjardins notes that billionaire money managers like Ray Dalio and Stan Druckenmiller are professional investors. They have entire institutional teams at their disposal, dive deep into the nuances and complexities of the market, and spend every waking moment of their lives thinking about how to get more from their investments.

They want to make money – but they also want to execute on strategies that will protect their wealth and build robust portfolios that can withstand any type of macro event.

TURNING TO GOLD

In recent months, some of these elite investors have turned to precious metals like gold as a part of their overall investment strategies.

In the following infographic from Sprott Physical Bullion Trusts, we explain why these investors are adding precious metals to their portfolios, the underlying tactics, and the best quotes each investor has on assessing today’s market.

Why are these billionaires buying precious metals?

Their cited reasons can basically be summed up with six categories: wealth preservation, store of value, inflation hedge, portfolio diversification, future upside, and investment fundamentals.

WHAT BILLIONAIRE INVESTORS ARE DOING

1. Lord Jacob Rothschild

In late summer 2016, Rothschild announced changes to the RIT Partners portfolio because he was worried about very low interest rates, negative yields, and quantitative easing, saying they are part of the “greatest monetary experiment in monetary policy in the history of the world”.

His solution? Buy gold to help preserve wealth, and as a store of value for the future.

2. David Einhorn

Einhorn has a similar assessment. He believes that monetary policy is becoming increasingly adventurous, and that this – along with the policies of the Trump administration – will eventually lead to large amounts of inflation.

In February 2017, he shorted sovereigns, and bought gold.

3. Ray Dalio

Ray Dalio is the founder of the world’s top hedge fund, Bridgewater Associates, but he’s also no stranger to gold.

If you don’t own gold, you know neither history nor economics.

– Ray Dalio, Bridgewater Associates

More recently, in 2016, Dalio is quoted as telling investors to own a well-diversified portfolio that is 5-10% gold.

4. Stanley Druckenmiller

Druckenmiller, some people argue, is the best money manager of all time.

Lately, he’s placed his bets on gold as well, but for different reasons than the above managers. Druckenmiller has always placed big trades with lots of conviction, and in February 2017 he put his money in gold because “no country wants its currency to strengthen”.

Legendary Investor Asher Edelman Says "I Have No Doubt" PPT Behind Market Rally

Legendary vulture investor Asher Edelman, the 1980s model for Gordon Gekko, strayed into what must’ve been uncomfortable territory for CNBC during an appearance on "Smart Money" when he discussed his view that the government’s "plunge protection team" is the only thing propping up the current market rally, and said he suspects that it has again been recently een intervening in the market to keep stocks at record highs.

Is the plunge protection at work? Legendary investor @AsherEdelman lays out the conspiracy pic.twitter.com/A3h7QyV1EC

— CNBC"s Fast Money (@CNBCFastMoney) May 23, 2017

Edelman simply notes that he doesn’t want to be in the markets right now because “I don’t know when the plug is going to be pulled."

Few can explain the market"s recent resilience, holding near record highs despite weak economic data and intensifying geopolitical tensions. The main benchmarks have risen for the fourth straight day following last week’s “Trump Dump" despite a terror attack in the U.K., the worst soft economic data since February 2016, and surprisingly low trading volume.

"@AsherEdelman: "I don"t want to be in the market because I don"t know when the plug is going to get pulled"

— CNBC"s Fast Money (@CNBCFastMoney) May 23, 2017

The “plunge protection team” was created by President Ronald Reagan one year after the stock market crash in 1987, when the president called for the creation of the “Working Group on Financial Markets.”

It’s believed – as the name would suggest and as has been profiled on countless occasions on this website previously – that the group’s mandate is to maintain stability in the market and head off any severe crashes like what was seen in 1987. It"s believed the group reports only to the president, though the head of the Treasury, head of the Securities and Exchange Commission and Federal Reserve Chairman are also involved. The team, according to Asher, steps in to execute trades on all exchanges when the market isn"t behaving as it would like, working only with big banks like Goldman Sachs Group and Morgan Stanley. 

"We have seen the most extraordinary lack of volatility in the VIX since Trump has been in office and it"s interesting the night he was elected you may recall the futures came down about 400 or 600 points.

You may also recall that the next morning they were even again. Watching plunge protection for years, I had no doubt that"s what happened."

That may have been the case in the 1980s, however in recent years the PPT is the collaboration of the NY Fed and Citadel, which are most aggressive during times of substantial market stress and selling, when intervention is needed to stop the downward momentum in prices.

Edelman says he believes one sign of TPP intervention is when a smaller, less-liquid stock suddenly rises late in the trading day.

We’ve noted in the past that there appears to be a rule against mentioning the team on CNBC – with guests routinely getting “Schiff’d” for doing so.

And once again, this time, the "theory" was treated with derision by his fellow hosts.

"I think we all have so many questions here I don"t think I know where to begin," Fast Money host Melissa Lee said.

Some audience members were more enthusiastic.

I can"t believe @AsherEdelman just talked about the PPT on @CNBCFastMoney. Didn"t think anyone was allowed to talk about it. That was crazy.

— Hun (@sincerewoo) May 23, 2017

The Simplest Reason Behind Collapsing Volatility: Hedge Funds Are Barely Trading

"Gamma", "vega", CTAs, risk-parity, vol-neutral, central bank vol-suppression, the soaring popularity of (inverse) VIX ETFs , and so on: over the past year there have been countless attempts to explain why despite the surging political uncertainty in recent years, and especially since the US election...

... global equity volatility, both implied and realized, has tumbled to record lows, sliding even below levels not even seen before the 2008 financial crisis.

There may be a much simpler reason.

In its latest hedge fund tracker report, which every quarter analyzes the 13F filings by US hedge funds, Goldman found something quite striking. When looking at the gross portfolio turnover of hedge funds in Q1, the bank found that it had retreated to a record low at 28% of positions in 1Q 2017.

At the same time, turnover of the largest quartile of hedge fund positions, which account for two-thirds of hedge fund long holdings, fell to 15%, close to its lowest level since 2002. As a result the typical hedge fund has 67% of its long equity assets invested in its 10 largest positions, a decline from last quarter but still near historical highs.

This suggests that in the first quarter, hedge funds found themselves even further "paralyzed", and for whatever reason have reduced overall trading levels to all time lows. This further suggests that with virtually no trading by the "smart money", those traditionally most likely to put on "volatile" positions, contrary to consensus, the bulk of executed trading took place among passive funds and other trend followers, which would facilitate and accelerate the ongoing decline in volatility.

Stated simply: volatility has collapsed for the simple reason that increasingly fewer directional, non-momentum chasing market participants are actually trading.

But if hedge fund turnover has collapsed, how do these "active managers" hope to generate alpha? One explanation is that in lieu of stock picking, hedge funds have simply lifted leverage to post-crisis highs as their most popular long positions outperformed in a rising equity market. The Goldman Sachs Prime Services Weekly shows that, after bottoming in mid-2016, hedge fund net and gross exposures have continued to rise. Net exposure (73%) is now roughly in line with its cycle highs reached in 2013, while gross leverage (234%) has soared to new post-crisis highs.

This dynamic has contributed to a virtuous cycle as our Hedge Fund VIP basket of the most popular hedge fund long positions rallied, outperforming the S&P 500 by 360 bp YTD (10.1% vs. 6.5%).

And while such dramatic concentration among the top positions has been observed before, most recently yesterday when we showed the fresh collapse in market breadth vs the once again resilient "broader" market...

... this bring up another key concern: with the bulk of hedge funds holding just a handful of names - mostly tech stocks comprising the so-called FAANG, which as a group have returned nearly 30% and are responsible for half of the S&P YTD gains - proppeled to record highs by a fresh burst of momentum chasing, what happens when for whatever reason, this trade is unwound.

This is Goldman"s take:

The rise in leverage alongside growing popularity of outperforming growth stocks has raised some concerns among clients, even while boosting their portfolios. Investors recall the sharp momentum reversal of early 2016, which came on the heels of a similar period of rising popularity and performance for “FANG” (FB, AMZN, NFLX, GOOGL) and similar stocks in late 2015.

Indeed, investors have reason to be concerned: for a vivid example of what happens when such "hedge fund" hotel trades go into reverse, look no further than Valeant...

With Paulson Down Nearly Double-Digits, Here Is How Other Hedge Funds Are Doing

John Paulson"s relentless slide into P&L mediocrity was on highlight today courtesy of an extended profile by the NYT, which reports on the hedge fund manager"s "fall from stardom", and details his surprisingly poor performance. Here are the highlights:

Paulson & Company, has recorded nearly double-digit losses in several of its larger funds as of the end of March... Mr. Paulson’s struggles come after a gut-wrenching 2016, when he recorded even steeper losses in those funds, partly because of several wrong-footed bets on drug makers, including the troubled Valeant Pharmaceuticals. That followed a painful 2015, when investors first balked and began pulling their money from his firm.

“While we are disappointed in performance in 2016, we believe we have a path to a recovery,” Mr. Paulson told investors in one letter.

But it has not been smooth sailing. In another letter to investors of a merger arbitrage fund that declined by 49 percent last year, Mr. Paulson called 2016 “the most challenging year since inception.” In May, Mr. Paulson will address his investors at a meeting in London at Claridge’s Hotel in London.

[Paulson"s] his assets under management continue shrinking. Paulson & Company manages just under $10 billion today, down from $36 billion in 2011. Nearly two years ago, some Wall Street banks began to recommend that investors redeem some of their money from the firm.

In another letter to investors of a merger arbitrage fund that declined by 49 percent last year, Mr. Paulson called 2016 “the most challenging year since inception.”

2017 is shaping up as another rough one for Mr. Paulson. The Advantage fund was down 9.7 percent as of the end of March and the Partners Enhanced fund continues to sink — falling just over 8 percent after last year’s 49 percent plunge.

Observing what we wrote last April, NYT repeats that over the last three years, Paulson"s Advantage has consecutively recorded double-digit losses. That follows earlier losses of 36% in 2011, 14% 2012, a modest 26% gain 2013, according to an HSBC industry report and people with knowledge of the firm’s performance. The losses were amplified in the levered Advantage Plus fund.

While Paulson suffered huge losses last year due to several concentrated bets on just a handful of pharma companies - Valeant alone cost Paulson $2 billion - and then there was Shire, Allergan, Mylan and Teva, his losses extended beyond those four names, and in a more troubling development investors pulled substantial amount of capital from the fund. As Forbes wrote recently,  in addition to P&L losses, Paulson suffered at least $2.5 billion in redemptions in 2016. As a result, according to the NYT Paulson"s AUM has continued shrinking, and today Paulson & Company manages just under $10 billion, down from $36 billion in 2011. "Nearly two years ago, some Wall Street banks began to recommend that investors redeem some of their money from the firm."

Still, don"t cry for John:

Even after several years of losing money for his investors, Mr. Paulson remains one of the richest men in the world — with a net worth of about $7.9 billion, according to Forbes. But, as the financial magazine recently noted, he is now $2 billion poorer.

So yeah, it"s been a bad year for Paulson, but how is everyone else doing? As it turns out, not that well either.

The following table using the latest HSBC data, breaks down the marquee hedge fund names" performance YTD, and shows that merely beating the S&P500 continues to remain an elusive goal for nearly all of the "smart money" out there

Finally, courtesy of HSBC, here are the top 20 best and worst hedge funds through the last week of April.

Not The Onion: "Fed Is Jeopardizing The Buy-The-Dip Trade", BofA Warns

Conceived several years ago, "buy the (fucking) dip" was a joke among traders seeking to explain the market"s nearly-instant upward mean reversion, which as we have alleged since 2009, has been pushed higher by central bank policy and various HFT strats. Since then it has, sadly, become perhaps the only "explanation" for the behavior of the most bizarre market traders have ever encountered.

Luckily, the buy the dip quote-unquote "market" may be about to end, perhaps as soon as tomorrow, if Bank of America is right.

In a note titled "Reasons to increasingly fear, not love, the dip", BofA analyst Nitin Saksena writes that a "faster US rate hiking cycle jeopardizes the buy-the-dip trade."

His observations will be familiar to anyone who has tried to top-tick the S&P over the past 8 years, to short stocks, or to otherwise do anything besides "buy" (the dip):

Saksena writes that a "buy-the-dip mentality is dominating US equities as Fed put has become self-fulfilling. It has now been 104 trading days since the S&P 500 last fell by more than 1% (on a close-to-close basis), a stretch of calm in US equities not seen since 1995."

Not paraphrasing the Onion, BofA then goes on to say that "this extreme buy-the-dip mentality is helping crush equity volatility, with S&P 3M realized vol now at a meagre 6.6% and in the 3rd percentile since 1928."

What the BofA strategist says next will not make him any friends among the "smart money crowd" whom he accuses of just being mechancial BTFDers, whose only skills are those of videogamers reacting to a sharp move lower which they then promptly buy:

Perversely, US equity sell-offs have seemingly become embraced as alpha (i.e., buy-the-dip) opportunities instead of being feared as bona fide risk-off events, as the central bank put has become a self-fulfilling prophecy. The abnormality of this development is best appreciated through the lens of market volatility, in our view. Chart 9 shows that the speed with which S&P volatility collapses from a state of high stress back to calm has been escalating since the Aug-15 shock, culminating in unprecedented mean reversion during the 2016 US Presidential election.

So what breaks the buy-the-dip trade? According to BofA, the same entity that created it of course: the Federal Reserve.

Given its influence today on equity market dynamics, we think it is critical to understand what could eventually break the buy-the-dip trade and drive more prolonged market shocks.

In our 2017 Outlook, we outlined one scenario that has come sharply into focus recently with the Fed deliberately and rapidly shifting market expectations towards a March hike and investors now debating whether the onset of an old-school pattern of sequential rate hikes may in fact be imminent (Chart 10).

Specifically, we think that if the Fed is handcuffed by its primary mandates of managing employment and inflation (not to mention potential fiscal stimulus and Fed leadership changes), it would no longer have the luxury of being credibly dovish in the midst of the next exogenous shock to markets. This would push the strike of the “Fed put” lower and in turn weaken one of the key supports for the buy-the-dip trade. In other words, a 10% sell-off in the S&P 500 would not alter the reality of stronger – and slow-moving – employment and inflation data, thus constraining the Fed’s capacity to adhere to its adopted “third mandate” of targeting asset volatility.

Positioning is also a key element of our thesis. If cash continues to get pulled off the sidelines as markets rally and US equity positioning becomes sufficiently bullish, we think markets would be further at risk from investors selling rather than buying a dip.

So with as little as 12 hours to go before the Fed kills the BT(F)D trade, what are BofA clients to do? According to BofA, "Equity puts contingent on higher yields attractive to hedge buy-the-dip failure "

Should the buy-the-dip trade become jeopardized as we outline above, equity puts contingent on higher bond yields should be a well-suited hedge that also aligns with our strategists’ bearish view on rates. The nominal cost of equity put protection is already historically low today (e.g., the current premium of an SPX 6M 95% put is in the 3rd percentile over the past 10 years). Moreover, realized correlation between bond yields and US equities, which had fallen to historically negative levels ahead of the US election as yields rose while equities fell, has since rebounded sharply as yields have risen alongside equities (Charts 11 and 12).

So is it over? Is BTFD about to officially become STFR with Janet Yellen"s blessing? Tune in tomorrow around 3pm after the initial kneejerk reactions to Yellen"s statement and Fed "dots" to find out. And just in case BofA is right, here is the clip that started it all for old time"s sake:

Why February May Be An Ugly Month For Markets: Here Are BofA's "Danger Signals"

With the S&P500 ending January on the back foot, more pain may be in store for markets in February.

This is the observation of BofA"s chief technician Stephen Suttmeyer, who provides several danger signals why bulls may want to be particularly cautious ahead of the coming months.

As he notes, the post-Presidential Election S&P 500 rally has done better than the post-Brexit rally, but there are warning signs moving into February just as there were coming off the mid-August post-Brexit S&P 500 peak.

These include complacent VXV/VIX and put/call ratios, a bearish divergence for the US most active advance-decline line, and a Net Tab sell signal. In addition, there is the risk of a weaker
February based on seasonals and the US Presidential Cycle Year 1 pattern going back to 1928. A close below 1.17 on the VXV/VIX as well as a cross for VIM Distribution above VIM Accumulation would increase the risk for following weaker February seasonals.

Of the items listed, we find the seasonal argument most persuasive. While February tends to be a weaker month for the S&P 500 in general and is up only 52.8% of the time with an average return of -0.05% going back to 1928, February is particularly weak in the first year of a presidential cycle: in that case February is up only 41% of the time with an average S&P 500 decline of 2.10%. Even more troubling, when the President is in his first term, February of Year 1 is up only 23% of the time with an average decline of 3.84%.

And then there are the purely "overbought" technicals, chief among which is the VXV/VIX ratio. As Suttmeyer notes, the VXV/VIX is overbought & complacent. The VXV/VIX spiked at oversold levels below 1.0 low on Brexit in late June and ahead of the US Election in early November. Overbought readings can persist and the VXV/VIX has been overbought for the most part since mid November. However, it could go even higher, and would take a decisive move below 1.17, similar to the bearish late August/early September signals, to suggest the risk of a deeper decline in the S&P 500.

Then, there is the 25-day CBOE total put/call ratio which generated a buy signal off the contrarian bullish or fearful levels associated with the US Presidential Election. However, since then this measure of tactical market sentiment moved to overbought in mid December and is on a sell signal off these overbought or complacent levels, which is a risk for February.

Finally, one last tactical concern moving into the weaker seasonal month of February is a bearish divergence on the US Top 15 Most Active A-D line. A bearish divergence occurs when an indicator peaks before the market does. A 12/27 peak for the most active A-D line vs a 1/25 peak for the S&P 500 is a bearish divergence (yellow light) for this important market breadth (and volume) indicator. The most active A-D line measures the breadth of the top 15 US stocks (market cap > 500m) by share volume. When this A-D line falls ahead of the market indices, it suggests that smart money may be selling into strength.

So while a further pullback may be imminent, BofA leaves on a hopeful note: "Many indicators support buying into dips", such as NYSE A/D line, a bullish MACD, Dow Theory still is confirming a buy signal, as well as global breadth which still remains bullish.

Hedge Fund Managers Expect "Massive" Pay Cut In 2016

With soaring hedge fund shutdowns, and countless "smart money" asset managers underperforming either their benchmark or the overall market, 2016 is shaping up as the worst year for the hedge fund industry since the financial crisis. Actually, in some respects it is even worse than that: according to Eurekahedge, the number of hedge fund startups, which were surging a decade ago, have fallen off a cliff in 2016 and are heading for their worst year since 2000.

According to Bloomberg, there have been just 457 fund launches through the first nine months of this year, compared to 876 in 2015, citing Eurekahedge numbers. "The capital raising environment for newer launches is quite difficult to put it mildly and with existing offerings out there returning low-single digits over the last three years, investor appetite is quite selective to say the least," said Mohammad Hassan, senior analyst at Eurekahedge.

But while launching a new hedge fund may be virtually impossible for a new generation of aspiring masters of the universe, at least until returns somehow return to their double-digit legacy norms observed during the industry"s heyday, what about those already employed by a long/short fund manager?

According to the latest report by Odyssey Search Partners, things there are not much better either. As Bloomberg writes, hedge funds portfolio managers are about to feel the pain from an estimated "massive" 34% reduction in their compensation. It would be the worst year for PMs in nearly a decade.

The news is a little better for those below the top level: professionals with seven or more years of experience see their total compensation declining by 14% on average for 2016, according to the Odyssey said in a report this week following a September survey of 500 hedge fund professionals.

Not everyone is expecting a pay cut: junior analysts with less than three years of experience expect their compensation to increase on average by 10 percent to $321,000. Then again, the youth is always most optimistic.

“2016 should prove to be a belt-tightening year,” according to the report. “This pessimistic viewpoint is justified, given the poor industry performance.”

There is another distinction, and an expected one: firms experiencing outflows this year are expected to pay 37% less in bonuses than those that had inflows, producing a payout closer to $288,000 compared with $394,000 for the better-performing funds, according to the report.

To be sure, even a "massive" pay cut for the highest paid industry will hardly evince much sympathy from the rest of America.  Then again, after the pay cuts then come terminations, and as alpha creation continues to decline we expect the current wave of hedge fund closures and layoffs to accelerate.

For now, however, there is a silver lining, if not for finance experts then for those who know hot to program algos and speak in court: according to the report, hedge funds are expecting to hire more people with technology or legal experience as many funds are looking to improve data analysis and compliance, according to the report. As for the rest, we know that at least central banks are hiring.