Treasury plays out as expected

I have talked about Treasury numerous times. The most recent one was to reemphasize my view that Treasury bonds have more to go up although in the near term, it could come down to take a rest. Here is what I said just two weeks ago: When the rally will stop? I don't know but I'd think this rally will last for at least some weeks, until we start to see dumb money becomes bullish again on Treasury.


One caveat thought about TLT. It is challenging its major resistance at the moment, the 50 DMA. More often than not, it may not be able to break out such a strong resistance at one attempt. Technically we could see TLT decline a bit in the next few sessions to rest a bit before mounting another attempt to break out. I won't be surprised TLT comes down to test its support around $120 in the very near term.


This seems to be a perfect script for TLT, an ETF for long term government bonds. TLT has indeed come down to kiss its support 120 and a bit lower actually. I think this mini correction for it has almost completed, if not yet done. Per the weekly COT report, smart money is still betting for more upside of Treasury and I think TLT has much more upside to go. Don't give it up just yet!!

This biotech gigant has likely bottomed

Early Dec last year, I was betting for a good response to the results of an important clinical trial on Alzheimer's Disease from the biotech giant, Biogen (BIIB).  While the initial response was indeed very positive, it quickly faded during the day and closed lower. What a disappointment!! I bet with naked puts for the event and obviously was not a very successful one. But due to the nature of the naked puts with relatively low risk, I actually came out with some profit although not as much as I'd have hoped for.  Since then, BIIB has basically gone now where with sideway moves. A couple of days ago, BIIB reported its earnings, which was rather disappointing due to weak forward guidance. Usually this should be a very strong selling trigger and initially it did drop like a stone. But amazingly, the next day it not only recovered from the overnight selloff, it actually bounced back strongly with a nice gain at closing. When a stock dose not negatively respond to poor news, it is a very strong signal that it has bottomed as those who wanted to sell have already sold. This is a typical bottoming sign.


Now more technically, BIIB actually has formed a gigantic bull flag. It is currently sitting on a strong support line and at the bottom of the flag. Virtually it has about 50 points long from bottom to top. If it's indeed bottomed, logically it should move up towards its top line around $330. If that is pieced through, then the flag pole length will come into play to expect how much higher it can further go, probably another 50+ points. So potentially BIIB is poised for a quite significant move in the months ahead. Of course, no guarantee this will play out as expected but the potential is there. One possible catalyst for its up movement is a potential M&A. BIIB has a lot of cash in hands and has been greatly criticized for not using the money to buy some good assets to boot its pipeline. I think it is under a good pressure and may be actively looking for doing so. No one know if and when it may do it but a deal may be already in progress.

Market has priced in a perfect Trump

It's simply incredible how much hope the market has given to Trump now! Since his surprising win in the election, there is a widespread euphoria prevailing now that Trump's administration will boost the economy. I agree in principle that what Trump has promised to do will be very positive to the US economy. Here is what he has planned to do that will be beneficiary economically:

• Cut the corporate tax by half and bring back the huge amount of money many companies hold overseas
• Bring down the individual income tax
• Largely overhaul the complicated regulations
• Significantly increase investment in infrastructure  

These indeed all sound very good and exciting but the thing is none of them are an easy task for Trump. You see, Trump is probably the most hated president in the US, not only by Democrats but also many Republicans. Even though GOP is now controlling both House the Senate, which is a great plus for Trump, it will still not be an easy job for him to try to get what he wishes to have. There are simply too many people from both sides who want to see a failed Trump, period! The first fight will be coming immediately regarding the US debt ceiling, which will be surpassed late March. Republican as a whole is very sensitive to the government deficit and not in favor of raising the debt ceiling. Recall that Obama government has been forced to close twice I believe due to the debt ceiling issue. What Trump is planning to do will be great in the long run but in the near future will significantly increase the debt load. I’m sure Trump will get a raised debt ceiling but probably will have many compromises he has to make. Actually each of his proposed changes will have some strings attached and I can hardly believe Trump would just get exactly what he asks for. In other words, while the market likes what Trump is planning to do and seems to feel that it will be a smooth implementation moving forward, I think there will be a lot of surprises along the way that will make the market nervous. We may not need to wait long before seeing some sort of shock to the market. Expect to see high volatility in the weeks ahead!

Looks like I’m not alone along this line of thinking. Here is what MarketWatch reported a couple of days ago: Demand for one-month call options tied to the CBOE Volatility Index, a popular gauge of stock-market volatility, has spiked in the past week, a sign that some are bracing for a sharp downturn following the inauguration of President-elect Donald Trump. In that time, investors have purchased 250,000 VIX call options with a strike price at 21, and another 100,000 with the strike at 22, according to Brian Bier, head of sales and trading at Macro Risk Advisors, an options brokerage. This is a huge red flag as we are talking about millions of dollars that some traders are willing to bet for a sharp increase of VIX in just a few weeks from now. When the market has priced something in perfection, be sure to expect good deal of disappointment that will spook the market. I continue to advise to be cautious in this euphoric extreme!!

Crude oil is doomed to fall first

Since OPEC agreed to cut their production a few weeks ago, crude oil has started an impressive rally and reached to around $55 not seen for almost two years. It seems a bullish case for oil is strong, with the expecting improving economy in the US under the new administration and a reduced supply from OPEC. I certainly agree and also cautiously believe that oil may have a brighter future over long term. But I highly doubt, oil will simply go up from here and actually a 20% correction is a good chance to happen in weeks ahead. Two major reasons:

• While OPEC countries are still the major oil producers, US has become equally an important oil producer now. Due to the severe bear market of crude oil in the past 2 years, almost all the US oil companies are cutting back their production but this can change very quickly. As reported, when oil price is consistently over $50, majority of oil companies using the new drilling technology, fracking, may be profitable. As such, they will not just sitting on their hands with increasing oil prices but will turn on their idle rigs to work again. It means the supply will quickly go up to offset the supply reduction from OPEC. The higher the oil price goes, the more supply we will see, which will depress the oil price accordingly. A consistently higher oil price can only be sustainable if the demand becomes really strong. I don't think we are at this point yet. So fundamentally, it is quite possible to see a lower oil price from here.
• Similar to the contrarian indicator I talked about regarding Treasury, the recent COT report is sending a very strong signal, indicating that the sentiment for oil is at an extremely high level with overwhelmingly bullish long positions held by the speculative traders, the dumb money! The bullish sentiment is so strong that we have only seen 2 times in the past year or so at such a degree and each time, a 20%ish crash of oil followed. Will this time be different? Certainly it is possible, but if history is any guidance, I think more than likely we will see a sharp oil correction in the weeks ahead, possibly also in the scale of 15-20% decline.

I think the crude oil technical pattern is also turning to bearish now, suggesting a much lower oil price is coming. Be cautious if you are euphoric about oil at the moment!

These two are moving too fast

Just a quick update on the two stocks I was talking about lately. Both of them are moving almost vertically shortly after I mentioned them.


One is Alexion (ALXN), a biotech that got hammered after both CEO and CFO were fired due to concerns related to their marketing practices. Here is what I said on Dec 16: So based on the technicals and fundamentals, I’m willing to bet for an upside run for ALXN in the next few months at least. I entered my positions already a few days ago and it indeed recovered a bit by now. It may still struggle for a while in the very near term but I think it is at its bottom for this round of correction. Well, it turned out that I was too conservative as Alexion has had a moon run over 20% up in less than a month. I think this is probably a lot to do with short squeeze when people followed the herd to short ALXN en mass when everyone was dumping. As of now, while ALXN long term technical is still very bullish, it is quite overbought at the moment and is due to come down first.


The other one is even more "scary", the uranium play with URA. Just in one week since I talked about it, URA has gone up 21% and it is truly a vertical straight line up. For sure it is widely overbought to the extent that it has never been so overbought in the past 5 years. Don't chase it. We are now seeing a typical herd behavior at the top, a panic buying that people are suddenly afraid of being left behind and want to get on board in rush. These are the people who will be shaken out first when a correction is coming, which will for sure come. Remember what I said, If it can hold up around $13 and further move up, it may indeed mean a gigantic turnaround for uranium may have started that will likely last for years to come. I cannot say for sure yet if the multiple year bull run has started as we need to see if URA won't give up all the recent gains and come back below $13. But I'm confident that the bull train may have left the station and you will certainly have good chance to get on board with much better prices if you are patient!

Treasury bonds may still go higher

I have started to become bullish on Treasury bonds since a few weeks ago and suggested the long-term Treasury could go up after a severe plunge (via TLT). As often the case, I'm guilty of being too early with my calls and TLT continued to declined for a while but it did turn around from its recent bottom around $117. Since then, TLT has mounted a nice rally, especially in the past few weeks and is trading hands around $123 today. Inversely, the long-term interest rate has also come down along the way. I got a question how I feel about the long term bonds and interest rates.


Well, it depends as always on what the timeframe we are talking about. As a long term view, I'm still very bearish about Treasury overall and I believe the 40 years old of the super bond bull market has already come to its end. If this is indeed the case, Treasury should have started a bear market that may likely last for decades to come. That's the nature of bond market that when they enter into a secular trend, it usually lasts for very long time. Can you imagine all the bond active traders aged 60 or below will only know a bull market? I bet it is a bit challenge for them to switch their mindset now that bonds may have started a mega bearish trend. Just a couple of days ago, the Bond King, Bill Gross, has publicly stated if the 10-year interest rate breaks out 2.6%, then officially the bond bull is dead. I think it is just a matter of time that this will occur for sure.


Having said that, nothing comes with a straight line, especially when we are talking about a super turning point for bonds. That's why I became very bullish on bonds lately after seeing so much selloff within a very short period of time. Now we got some nice rally as expected. Has this rally done that we should see lower Treasury and higher interest rates? I don't believe so. I think there is still some room for Treasury to go up and interests to go down. Why so? For one major contrarian factor. As I have talked about COT a few times before, this weekly government report discloses the future traders' betting or sentiment on almost everything. Typically, the smart money (the commercial traders who really know the stuff they are trading) is often right at the time point that they are mostly long at the bottom or short at the top. Conversely, the dumb money (those speculative traders) often do the opposite, long at the top and short at the bottom. Right now, the dumb money as of last week is still extremely bearish on Treasury bonds with the open short positions at a historically high level. This is usually not a good sign for those who are bearish on Treasury in the short term. It often means that the current rally of Treasury may likely continue for a while. When the rally will stop? I don't know but I'd think this rally will last for at least some weeks, until we start to see dumb money becomes bullish again on Treasury.


One caveat thought about TLT. It is challenging its major resistance at the moment, the 50 DMA. More often than not, it may not be able to break out such a strong resistance at one attempt. Technically we could see TLT decline a bit in the next few sessions to rest a bit before mounting another attempt to break out. I won't be surprised TLT comes down to test its support around $120 in the very near term.

Think out of box

The US market is extremely resilient and doesn’t want to give in to any selling pressure. All the three major indices have hit all time highs multiple times. It looks like Dow must have to go above 20000 before it will give up. But underneath the enormous bullishness, I’m still seeing technical warning signs. I stick to my earlier call that we are going to see some significant decline of the US stocks pretty soon. I of course don’t know when but I think it will be pretty soon most likely some time in January.

Fundamentally US stocks are very expensive as a whole and therefore contain substantial risks for buying them at this level. So where are cheap stocks that can be considered? Hold your chair before reading further as you may think I must have lost my mind to say that. I think it is a good time to think about Italian stocks!

Am I losing my mind? You see, Italy is currently the weakest link in the EU and its banking system is on the verge of collapse. They have just got the referendum done to vote down the current government and likely soon they will have an extreme conservative party leading the power that promotes to leave the EU. If that happens, EU will collapse and Euro will come to its end. So why I’m now talking about buying Italian stocks? Well the market must know something that we don’t know and it can often predict something months ahead. Clearly the market is telling me that Italian stocks are worth taking. Look at EWI, the ETF for the Italian stocks. After enormous turmoil in the past year, EWI simply refused to go down below $20. And then something amazing happened after the Dec referendum that was supposedly very negative for the country. EWI has mounted a forceful rally and jumped 25% within a month or so. Looking at its daily and weekly charts, technically EWI has a quite bullish momentum behind its recent rally. I think the market is clearly sending us a message that the most dangerous time for Italian stocks is probably over. I’m also puzzled about this but I think I at least partially know why. For one thing, the market has factored in all the major risks after it has come down so much in the past few years. Now the Italian stocks are probably one of the cheapest ones around the world. So fundamentally they are cheap enough with good valuation. The other reason is something I got from my son, who knows Europe very well, especially their political systems. He told me that even if the extreme conservative party gets the lead for the government, it is unlikely they would get the majority to have a single party government. Most likely they will have to find another one or more parties to form a coalition government. Because their policies and ideas are so extreme, they won’t easily find anyone that will simply join them without some major compromise, especially regarding the motion to leave the EU. So very likely, Italy will remain in the EU regardless of the election result. This indeed makes sense and I think the market is also thinking that way.

One caveat though. I don’t think EWI is a good buy immediately. After such a rally within such a short timeframe, it is a bit overbought. It is right at an important junction point around $25. This is a strong resistance it must overcome first. Either it decisively breaks out above 25 or it may more likely come down first to form a higher low. That will be an ideal entry point for me.

A new “cold war”?

We have got a very untraditional US president for sure and even before he officially swears in, he has already shown how unusual he will be. For one thing, Trump loves Twitting and he is using Twitting to convey various thoughts in his mind, good or bad. Not sure if you have noticed, he has already saved the US government billions of dollars by simply Twitting his criticisms about the high costs for Air Force One (by Boeing) and F-35 (by Lockheed Martin). Well, both companies feel the heat and have promised to low down the costs.  Same globally, governments are one of the most stupid entities when talking about expending as they are always overpaying for projects. No officials really care about it as it is not their money and wastes by governments are widespread and acceptable. After all, tax payers will have no choice to just pick the tags regardless how much waste a government project involves. As a businessman, Trump may start to change this kind of mindset!!

Well, actually this is not my main topic today. What I recently saw from Trump’s Twitting was an interesting verbal interactions between Trump and Putin:

From Trump in December:  

The United States must greatly strengthen and expand its nuclear capability until such time as the world comes to its senses regarding nukes.

President Putin said on the same day:

We need to strengthen the military potential of strategic nuclear forces.

Then, Trump replied:

Let it be an arms race. We will outmatch them at every pass and outlast them all.

So what do you feel about this exchange? Well, for me, it reminds me of the historical “cold war” between US and Soviet Union. Don’t get me wrong that I wish a new cold war between the two would start. Not at all as it would be a very bad thing for the world. But we have to face the fact that Trump likes to speak his mind and I cannot say he is not serious about strengthening the US nuclear capability and if so, for the balance, Russia may have to do something similar. If that happens, it may mean the decade long policy of reducing nuclear weapons by both countries could come to an end. I don’t believe both Trump and Putin really mean to engage in a direct confrontation as both seem to have some good chemistry for improving the relationship but still they may start to expand their nukes anyway.

So what does this mean from the investment perspective? For sure it will mean more demand for the nuclear material, uranium. In addition to the potential expanding of the nuclear weapons, Trump is also very much in favor of nuclear-energy. He once said:  “I’m in favor of nuclear energy, very strongly in favor of nuclear energy.” Either of the two or both could mean a real turnaround of uranium demand. If you don’t know, uranium has started its relentless downtrend since 10 years ago, with its price dropped by 85% from its peak in 2007. Even just last year, its price plunged over 40%. Believe or not, the uranium spot price at the moment is below the production cost, which cannot last for long economically. Apart from what US and Russia may do militarily and commercially with uranium, many other countries are and have plan to further expand their uranium use by building more nuclear reactors for increasing demand of energy. This includes countries like China, India, Jordan, Iran, and Argentina. Even Japan has changed its policy to reopen its nuclear reactors.

I think the market has sensed about this coming changes and quietly uranium prices have started to move up.  Look at the ETF for uranium companies, Global X Uranium ETF (URA). It seems to have broken out its one year downtrend lately. If it can hold up around $13 and further move up, it may indeed mean a gigantic turnaround for uranium may have started that will likely last for years to come.

Risk is very high

Happy New Year friends!
The last week of last year was extremely light in trading and not much moves involved. So I took the chance to relax with my family by doing some home improvement work that I can manage. Quite a fun time indeed! Now we are entering into the new year and obviously the most demanding question for traders is where the market will go in the near term. I of course don't know for sure but I do have a strong opinion. So here is my first prediction in the new year for 2017:


I bet January will be a terrible month for stocks in general. I think the risk is very high!!


Why am I so bearish? Two major concerns I'm seeing:

• I was wrong by expecting that the last week or so in 2016 for the stock market would be bullish and up. Traditionally this is a very well established seasonal bullish week positive for stocks. But not this time. This to me is a warning signal from the market. The Trump rally in the past 2- months has gone a bit too far too fast! The euphoric sentiment has been too strong to last any longer. I think the market wants to rest at least for the short term. The correction may start very soon in Jan, if not yet started.
• The seasonality also does not bode well with stocks. Based on historical data, Jan and Sep are the two worst months for stocks in general. Given the extremely hyped  sentiment with fast elevated stock prices, I think this Jan may be a pretty bad month, worse than usual probably. A 5% correction is not unthinkable to expect.

If this indeed happens, VIX (e.g. VXX) will shoot up quickly as it has been depressed so much to the historical low level. That's why I'm betting on VIX now that it will go up fast in the next few weeks. I'm also sticking to my expectation that Treasury (e.g. TLT) will go up soon. Of course, both are short term trades only.


Wishing everyone a very prosperous 2017!!