Your Road Map For This Yen Rally

From the desk of Thomas Bruni @BruniCharting


With the Yen rallying nearly 10% from intraday low to high in as many days, this breakout is not one to be ignored. Since the Yen has  a strong negative correlation with US equities, this inter-market relationship is an important one to keep track of regardless of whether you trade currencies or not.

Structurally the Yen has been trading in a seven point range at and below the 2006-2007 lows for the last 15 months. Late last year prices confirmed a failed breakdown by breaking back above the 2005 & 2007 lows, as well as the downtrend line from the 2012 highs.

Over the past two weeks prices have accelerated to the upside, providing additional confirmation that this market is headed higher. As long as prices can hold above support outlined in gray (.0082), then the weight of evidence suggests the first upside target is near the 161.8% extension of the late 2014-2016 range and prior support near .0098-.0099.

Desktop Chart Continue reading


The Monster Breakout Underway In Dollar Swissy

From the desk of Tom Bruni @brunicharting


Over the past five years or so, USD/CHF has been laying the foundation for a structural breakout, a structural breakout that looks to be in its early stages as 2016 begins. Before I get into the price action, I think it’s important to understand the context that this move is occurring within.

From a sentiment perspective, my data suggests that commercial hedger positioning and public sentiment are both at neutral levels. Sentiment is only important at extremes, which I don’t see currently, therefore this will be the extent to which I discuss it in this post. In terms of seasonality, my data suggests that over the past thirty years, January-March has been the worst three month period of the year for Swiss Franc performance. The combination of these factors provides a slight tailwind for USD/CHF longs in the early months of the year, but overall, this market continues to trade within the context of a neutral backdrop.

From a structural perspective, the weekly chart shows the decade-plus long downtrend that this market has been in since prices peaked in 2001. In 2011, prices accelerated to the downside, quickly reversed, and have since been trading within a range of 0.86-1.00. The four and a half year base that formed allowed momentum to improve, the 200 week moving average to flatten out and begin rising, and for prices to test the downtrend line from the 2003 highs multiple times. The development of the conditions which support a sustainable rally allowed for prices to break out late last year, retest the breakout, and continue higher. If this breakout holds, the first structural target lies near 1.13-1.14 at prior support and the 38.2% retracement of the 2001-2011 decline, which represents roughly 12% upside from current prices.

usdchf bruni 1

Continue reading

9 Market Themes To Watch Heading Into 2016

First of all, I want to say that the purpose of this post is not to make predictions about the future, so if you’re expecting a 12-month price target for the S&P 500, you’ll want to look elsewhere.

Throughout this exercise I used the weight of evidence present in markets around the globe in order to identify some market themes that I think will occur throughout 2016. Lastly, I want to say that none of these market themes are set in stone. As a market participant, I’m not here to be right/wrong, if/when the weight of evidence changes I’ll adjust.

Without further adieu, here are the nine market themes for 2016.

1.   Developed > Emerging Markets

Since the SPY / EEM and VEA / VWO ratios bottomed in 2011, they’ve been on a complete tear, representing the broad outperformance of stocks in developed markets over emerging markets. These ratios developed multi-year bases and the breakouts from them were quite explosive. Despite their aggressive rallies, there is little evidence that suggests they’re ending anytime soon. There is evidence however, that their progress may be due for a bit of a pause in 2016.

The SPY / EEM ratio is approaching the 38.2% retracement of the 2000-2010 decline, which also corresponds with prior support near 6.7. In addition, momentum has negatively diverged at the recent highs, which has preceded pullbacks or consolidation periods in the past. Structurally this uptrend looks great, but we may see some consolidation this year before it breaks out to new highs.

spy eem ratio relative performance chart 20 years_2016 market themes

Similar action is occuring in VEA / VWO as it approaches the highs it made in 2008. Despite the strong structural uptrend, momentum recently diverged as the ratio made new highs, suggesting a pause may be needed. Our structural target remains the 2008 highs, which also corresponds with the 161.8% extension of the 2014 correction. Despite this continued outperformance, I’d expect to see some consolidation in this ratio before it makes new highs.

developed markets outperforming emerging markets chart_2016 market themes

2.   Large-Caps To Outperform

Over the past decade or so, the ratio of large caps stocks to small caps stocks (SPY / IWM), has been forming a major base and is starting to break out of it. If the ratio can clear 1.80, then 1.95 is the next big level of resistance. If this ratio can eventually get above 1.95 there is room for a lot of potential upside. I’m going to continue to watch this chart throughout the year as I think this may be the start of a much larger / longer-term trend. And this could be one of the major market themes for this year and perhaps years to come.

spy iwm large caps outperformance chart_2016 market themes

3.   Commodities As a Group Will Continue To Slump

This doesn’t necessarily mean another big down year for the group, it could very well mean a flat year. Many of these markets in strong structural downtrends or trendless markets, meaning that time will be needed for them to reverse / sustainable uptrends to develop. That doesn’t mean that there won’t be counter-trend / mean reversion opportunities to take advantage of over the year, but it does mean that we shouldn’t be expecting strong multi-year downtrends to reverse themselves in a relatively short period. Time heals all wounds, even in markets, but we have to be patient to allow sustainable trend reversals to take place.

A good example of this is Crude Oil. Many commodity charts have been more or less crashing below downward sloping 200 day moving averages for years. Sure, some counter-trend opportunities presented themselves in 2015, but the structural trend is still in place and will take weeks / months / years for these trends to change.

crude oil daily chart downtrend in motion january 2016 Continue reading

The Importance of Investing Early

In business school, two of the core principles taught in intro finance courses are the time value of money and compound interest. Grasping these concepts is crucial in understanding the importance of beginning to invest as early as possible. Most people are familiar with these concepts but do not have a formal definition or framework for  understanding them.

1. Time Value of Money: The idea that money at the present time is worth more than the same amount in the future, due to its potential earning capacity. In simpler terms, $20 is worth more today than $20 a year from now, because I have the potential to earn interest on the money I receive today. The key takeaway is that provided money can earn interest, any amount of money is worth more the sooner it is received.  

2. Compound Interest: Interest calculated on the initial principal and accumulated interest, or in simpler terms, “interest on interest”.

Now why does this all matter? Well, all of us are going to have to retire someday, some of us sooner than others, but without knowledge of these key concepts we’ll all have a tough time getting there. For the example below, imagine that you are investing $5,000 annually in the S&P 500, which has returned roughly 9% annually since 1928. For the sake of this calculation we will assume that the initial investment account starts at zero and that the $5,000 investment will be made at the end of each year.

Present Value 0 0 0
Interest Rate 9.00% 9.00% 9.00%
Years Invested 40 30 20
Contributions Per Year 1 1 1
Amount of Contribution $5,000 $5,000 $5,000
Future Value (Age 65) $1,689,412.23 $681,537.69 $255,800.60

As you can see by the first column, a mere $5,000 invested annually grows to roughly $1.7 million dollars over forty years. I know, I know, adjusted for inflation the number will be lower but the principle I am trying to illustrate remains the same. The second and third column show the investment return over thirty and twenty years respectively. As you can see, with only 10 years less time invested, the investment return is over $1 million dollars lower. Investing over twenty years yields  a mere $255 thousand, still a significant amount, but much lower than what could have been had the investment had more time to compound.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

The Anatomy of a Risk-Off Environment

Today I want to discuss the role of intermarket analysis in assessing the risk appetite of market participants. I’ll outline the charts I’m looking at across all asset classes and give my thoughts on them. I think US markets are structurally the best in town, but some of the technical damage we’ve seen develop year to date will take some time to repair itself.

The first chart I want to look at is the S&P 500 versus the Emerging Markets ETF. This chart really highlights that even as I have been expressing concerns about US equities over the past few months and think that we’re due for continued volatility over the intermediate term, US equities are still the best game in town from a structural perspective. We have put in a long term rounding bottom against emerging market equities and as long as we stay above the gray shaded box, there is no reason that US equity market outperformance can’t continue.


Continue reading