Even Central Banks are Forced to Buy Stocks

Talk about a classic catch-22. Central banks around the world are haunted by the very monster they created – low interest rates. This forces them to buy stocks. But, this is not the only reason for relentless stock market highs.

The low-interest rate environment is not only putting the squeeze on savers and retiree’s, it’s also forcing central banks to look for greener interest pastures.

Central banks are caught in a classic catch-22 scenario. To spark their economies, central banks have lowered rates.

This has cost central banks around the globe $200 – $250 billion in interest income. Some of those losses have been offset by reduced payments of interest on the liabilities side of the balance sheet, but nevertheless, bankers are haunted by the monster they created.

What can central banks do to boost their bottom line?

According to a study by the Official Monetary and Financial Institutions Forum (OMFIF), “a cluster of central banking investors has become major players on world equity markets.”

The OMFIF report identifies $29.1 trillion in market investments. This includes investments in stocks, like the S&P 500 (SNP: ^GSPC), and precious metals.

Based on research from 2013, central banks held $10.9 trillion of currency reserves, that’s about 20% of the $55 trillion market value of global stocks.

A survey of central banks, taken in 2013, revealed that 23% of polled central banks own stocks or ETFs – like the SPDR S&P 500 ETF (NYSEArca: SPY) – or intend to buy stocks or ETFs.

For example, the Swiss National Bank has an equity quota of 15% and is investing in large, mid-and small-cap stocks in developed markets worldwide.

China’s State Administration of Foreign Exchange, part of the People’s Bank of China (PBoC), manages about $3.9 trillion and has become the world’s largest public sector holder of equities.

Here is where the ‘rising tide lifts all boats’ analogy comes in.

The Profit Radar Report has persistently maintained that buying power behind stocks (a proprietary gauge of demand chasing stocks) remains strong.

The Profit Radar Report uses this proprietary buying power index to gauge the odds of major market tops and stated in March, April, May, June and July that the buying power is too high for a major top (continous buying power updates are available via the Profit Radar Report).

But central bank liquidity is not the only reason for continuous S&P 500 highs. There is another reason, one that is much easier to monitor and gauge than covert central bank buying.

The reason why the S&P 500 continues to rally without a major correction (1,000 days and counting) is discussed here:

The Only Indicator that Foresaw a Persistent S&P 500 Rally with no Correction

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Advertisements

Bullish vs Bearish Indicators – Who Has the Upper Hand?

Recent articles highlighted various individual indicators. Some were bullish, but the majority was bearish. This article reviews previously discussed signals and boils them down to one outlook.

In recent weeks we’ve examined various indicators, studies, gauges and seasonality. Some bullish, some bearish. But what is the balance? Does the weight of evidence suggest higher or lower prices?

Listed below is a summary of articles designed to help form an educated and balanced opinion. Articles are categorized as bullish or bearish based on their implications. >> click here to view all the links to prior articles.

Bearish:

April 23: Dow 16,000! Headline Indicator Sways Into Bearish Territory
Barron’s Big Money Poll delivered the most notable sentiment extreme in 2013. Professional investors’ record bullish outlook is bearish for stocks.

April 17: Did ‘Sell in May and Go Away’ Arrive Early?
Based on consistent seasonality, the March 31, Profit Radar Report suspected a mid-April and May double top. The mid-April high is in and the ‘double top’ appears to be in the making.

April 16: From Gold Glitter to Jitter: An Explanation for Gold’s Historic Decline
Falling precious metals prices often foreshadow weakness for stocks.

April 10: Bearish Buying Climaxes are Adding Up for Stocks and Even the S&P 500
Buying climaxes are a sign of distribution, which is bearish for stocks. Discussed in detail was a buying climax in particular for the S&P 500. The most likely outcome was a delayed (1-2 weeks) decline, which is what occurred.

April 4: Yield Spread Between Junk Bonds and Treasury Bonds Hits Alarming Level
The ‘risk on’ trade has reached a level that’s caused trouble in the past.

April 1: AAPL, GOOG, AMZN and MSFT – Tech Sector Giants Turn Laggards
The lagging behavior and lack of leadership by ‘Big Tech’ suggested that the rally is starting to run out of steam.

Bullish/Neutral:

April 17, Profit Radar Report: “There are open chart gaps at 2,850 for the Nasdaq-100 (and 1,588 for the S&P 500). In recent years all chart gaps have acted as magnet and the Nasdaq-100 (and S&P 500) should come back to close those gaps. We’ll close our short positions at 2,740 – 2700 (and around S&P 1,540).”

April 19: Weekly ETF SPY: Russell 2000 ETF – IWM
The Russell 2000 and S&P 500 bounced off major support. That’s bullish … as long as support holds.

April 17: Despite Extreme VIX Movements, Option Traders are ‘Lukewarm’
Option trader sentiment has established a solid track record as contrarian indicator. Contrary to the deeply complacent readings of the VIX, other option-based indicators (like the SKEW index) aren’t even close to bullish extremes.

April 11: Retail Investors Turn Record Bearish as S&P 500 Climbs to All-time High
The most volatile of sentiment gauges fell to a bearish extreme. Viewed in isolation that’s bullish for stocks, but only viewed in isolation.

The April 17 VIX/SKEW article summarized the overall situation as follows:
“To an extent, option-trader sentiment is in conflict with other bearish sentiment extremes discussed recently. When sentiment indicators conflict, technical analysis and support/resistance levels become even more valuable.”

Technicals highlighted key resistance at 1,593 and key support at 1,538. As per the Profit Radar Report, we went short the S&P 500 once the S&P 500 dropped back below 1,590 (April 12) and covered our short positions at 1,540 and 1,562 (April 18 and April 22).

Based on the weight of evidence, there will be a short windon with a low-risk opportunity to go short.

How to go short with minimal risk is revealed in the Profit Radar Report.

Gold and Silver Plummet – Why and How Much Lower?

Gold and silver are the de facto “flight to safety” trade. Concerns about inflation (QE4) or the fiscal cliff were supposed to drive precious metal prices higher. This didn’t happen, here’s why:

It’s been a terrible week for gold and silver. Fundamentally precious metals should have rallied following the Fed’s announcement of QE4 (What is QE4?). Here’s the fundamental rationale.

The Fed’s plan to spend an additional $45 billion of freshly printed money (QE Tally – How Much Money is the Fed REALLY Spending?) is supposed to create inflation. In theory, gold and silver are “default inflation hedges”.

Investors trust this theory and put their money where their mouth is. How do we know this? Assets in the most popular gold ETFsSPDR Gold Shares (GLD) and iShares Gold Trust (IAU) – soared to an all-time high.

However, a theory (in this case the theory that QE will lead to higher gold and silver prices) remains only a theory until proven correct.

What Caused the Gold/Silver Mini Meltdown?

Contrary to this theory, the December 16, Profit Radar Report noted that:

“Holdings in gold-backed exchange-traded products reached a record 2,629.3 metric tons. However, all this gold buying hasn’t done much for gold prices. In fact, with so many buyers already committed, there are now fewer buyers out there. Despite seasonal tailwinds, the sentiment picture suggests at least a shakeout sell off.”

For those interested in trading gold, here’s the trade recommendation provided by the same update: “Unfortunately our UltraShort Gold ProShares (GLL) order wasn’t triggered last week. Now aggressive traders may go short gold with a move below 1,690 (around 163.80 for GLD). An approximate buy trigger for GLL (a 2x inverse gold ETF) would be 61.50.”

The corresponding trade setup for silver was as follows (updated chart shown below): “The dashed gray trend lines illustrate past instances where break downs and break outs resulted in low risk entry points. The green support line just below current prices (@32.30 – around 31.20 for SLV) may provide a low-risk entry to go short for aggressive traders. The only available short silver ETF is the 2x inverse UltraShort Silver ProShares (ZSL).” ZSL jumped from 45 to 52.

How Low Will Gold/Silver Fall

I honestly don’t know how much farther gold and silver will fall. However, the two charts below show that both metals reached respective support levels.

No one has ever gone broke taking profits and more often than not, it pays not to get too greedy.

Gold provided a nice 50-point drop and silver declined more than 10% in less than 3 days (nearly 20% for ZSL). We locked in all of our silver profits and half of our gold profits. The remaining half of short gold positions is equipped with a stop-loss that guarantees profits.

Semi-weekly updates and trade setups for gold, silver, the S&P 500, and other asset classes are provided via the Profit Radar Report.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.