Year: 2016

FXI, China big cap ETF, update

Hamilton

Then, July 27, 2015, and now charts as usual;

FXI july 27 2015fxi feb 1 2016

In these blogs we have always taken a dim view of China, not because we have a predilection for the comic depiction of all things Chinese being confined to the world of laundry and dry cleaning, but because we think that China is the embodiment of the largest mis-allocation of capital ever in the history of mankind. That, of course, is the basis for depressions and also for Schumpeter’s creative destruction.

Last year we showed how well many of the tenets of EW were met with the chart on the left. Things actually moved along at the speed they should have. Recently we reached the lowest level of the triangle that separates the two zig-zags in this double zig-zag. It would not be surprising if the pause in the second zig-zag becomes more complex than it presently is. Even so we should continue to, at least, 16 or so. This pattern is different from the large flat that we have seen in many mining and commodity stocks. The C wave does not have to unfold as a 5-wave structure as I erroneously indicated on the July chart. Instead it should develop as a zig-zag which follows the 5-3-5 pattern. What we do not know for sure is if the 3 is done and we are in the second 5 part, or if it will take a little longer. Considering the steepness, it should not take very long before it continues down.

The PBOC, Peoples’ Bank of China, should be completely impotent to do anything about the existing excesses un till such time that the have dissipated. That is a matter of time, not monetary stimulus.

DPV = Discounted Cash Flow or Present Value.

Hamilton

 

DPV = \sum_{t=0}^{N} \frac{FV_t}{(1+r)^{t}}

 

The stuff above the line in this fraction is the numerator and below the line the denominator. The V stands for value, Present or Future and r is the “rent” or interest rate. t is used to denote a specific time frame in an series of time frames from 1 to N where N can be infinite.

     In economics it is a settled principal that the value of literally anything can be determined by this formula, albeit in a rather abstract way. You will notice immediately that when r, that is  the interest rate, drops to zero the denominator approaches unity and consequently loses its purpose in the formula which then becomes PV=FVt for t,1 to n.

   As 1 to n can be an infinite string of time periods the value of an income stream starts to approach infinity regardless of how small the income might be in each period. Human nature is such that we normally prefer gratification today above tomorrow. That is why interest rates are positive. By making them negative central banks around the world are, as it were, denying human nature. In the process they up the value of all assets which now seems to be the unstated goal. When yesterday the BOJ makes a surprise announcement that interest rates would be pushed to zero or in negative territory, the Nikkei 225 responded with a 872 point move between the low and the high of the day, or slightly more than 5%. Considering that a 10-year bond was already going for 1% ( for the whole ten years, not annually), the absurdity of it all becomes apparent (equities do in one single day what it takes government bonds to do in 50 years!). The Dow joined in with 400 points. The Dow and Nikkei have roughly the same numerical value!

   It has been shown that the top 60 billionaires (Forbes listing) now have wealth in excess of what the bottom half 3.500.000.000 people on this earth have. To no small extent this is due to Central Bank policies. Income and wealth inequality have been proven to be significant precursors to economic downturns.

Nikkei 225

Hamilton

Nikkei jan 28 2016

We did not call this an update, preferring instead to forget previous errors. This index was down almost 24% at the recent lows measured from the highs of 2015. Our attention was drawn to this index simple because of the Bank of Japan’s recent moves to go for negative interest rates. Monetary stimulus has done very little for this economy other than devalue the yen. Now with one of the worlds highest levels of government borrowing they want to do a little more just to see if this time it might work.

From an EW perspective we have two almost but not yet equal legs down that together could form an a-b-c correction. That would call for a new high down the road. Alternatively it could become a series of 1-2s or something very bearish. Of course you always, no matter what get to a point where you have these two possibilities while you wait for the pattern to develop further. The only thing we do know for sure is that a C leg MUST subdivide in a 5-wave sequence so this is not done yet. We are presently in a 4th wave of something. This is an amber light in our trading approach, leave it alone.

By the way, the DOW is not in a significantly different position.

DJIA, Dow

Hamilton

djia jan 28 2016

This is the DOW today. It is a diagonal triangle in EW terms, a wedge in English. It is normally characterized by overlap which occurs here with just about every wave. It does not bode well for tomorrow morning. We will see.

What it reminds me of is that I used to put out a morning letter on the long bond futures contract that went out at around 7.30 a.m , well before the opening of the bond futures in Chicago. I did that faithfully for about four years in a row. My point is that you do not need more than one or two stocks or bonds to accomplish all you want in the market. You just do it more intensely.  In Canada you could use the HXD and the HXU and just switch from one to the other. If you are interested in oil, the same can be done with HOU and HOD. The advantage of such an approach is that you do not lose sight of what you are doing, as , for instance, I do all the time with this blog as I cannot keep track of 500 stocks.

Here they are;

hod jan 28 2016hou jan 28 2016

In a week these gain or lose 50% no problem. Beats buying Husky or something like that. Good luck.