GaveKal Capital FX Volatility Index at a 14 Year Low

We wrote yesterday about the collapse in JPY/USD volatility so we thought we'd quickly highlight other crosses are experiencing a dearth of volatility as well. According to our proprietary volatility index, which measures volatility across all the major currency pairs, FX vol is at a 14-year low and is very close to the lows seen in 1996.

Can Copper Prices Continue Climbing?

Copper prices continue to recover from weakness earlier in the year, but are approaching an area of resistance:



Taking an even longer-term view, we see just how important this level has been in the past five years:



Our point-and-figure chart also indicates that copper prices are at an important juncture on a technical basis:

Relative Strength Technical Scores Showing Deterioration in New Highs

Earlier today we commented on our proprietary scores of relative strength point & figure stock charts and highlighted areas of relative strength and weakness in the market place based on these scores. In this post we'd like to make another interesting observation related to one component of our proprietary scoring model. Specifically, we'll be honing in on the percent of stocks that are at new cycle highs on a relative strength basis.

In the table below we show, on a monthly basis, the percent of stocks in each MSCI region that are at new cycle highs. It is evident when looking at the table that in each region the percent of stocks at new highs has deteriorated markedly over the last few months. North America has seen the largest decline in stocks at new relative strength highs as just four months ago 23% of stocks were at new highs and today only 6% of stocks are. The second table shows the breakdown by sector.

What Does the Collapse of JPY/USD Volatility Mean for the VIX?

A lot has been written recently by us and others about the absolute collapse in volatility in financial markets. Whether stocks, bonds, FX or commodities, volatility is making multi-year lows, but the lack of volatility in the JPY/USD cross is among the most stunning of cases. As chart 1 below shows, the 1-quarter standard deviation of daily changes in the JPY/USD, at 4.5% annualized, is at the lowest level since 1977 and is less than half of the average volatility (10.2% annualized) experienced since the yen began to float in 1973. Because this volatility series displays no long-term trend and is nearly 2 standard deviations below average, we should expect the volatility of the JPY/USD cross to return the mean, which implies at least a doubling, at some point soon.

What a doubling of JPY/USD volatility would mean for other assets, then, is an interesting question. In chart 2 below we plot JPY/USD volatility against the VIX and observe a tight relationship over the last decade. A doubling of JPY/USD volatility would, therefore, likely coincide with a pickup in implied volatility of US stocks.

Trends in Technical Scores

As part of our process, each month we evaluate our point-and-figure charts with a proprietary scoring model for those companies that have qualified as knowledge leaders.  While this helps us spot important changes in momentum for individual stocks, we can also see trends among sectors and sub-industries.
For the MSCI World Index, the Energy sector is the highest scoring group on a relative basis while Utilities are the lowest scorers, on average:



Though Energy receives the highest overall score, the best scoring sub-industries in the MSCI World come from the Health Care, Consumer Discretionary, and Industrial sectors.




In MSCI Asia-Pacific, where no Energy stocks fulfill the requirements to be a knowledge leader, Industrials are currently the strongest sector:



Consistent with the regional trend by sector, many of the best scoring sub-industries can be found in the Industrials group while those underperforming the most are found in the Financials and Utilities sectors:




Energy and Health Care top the list in MSCI Europe as the strongest performers:



The highest and lowest scoring sub-industries in MSCI Europe are more widely distributed than the overall sector trends would suggest:




And, finally, in MSCI North America the early cyclicals look stronger than some of the more defensive groups:



By sub-industry, however, some of the highest performing groups come from the Health Care and Consumer Staples sectors:

Momentum Is Surging in Asia-Pac; Has Europe Peaked?

There are many tools that can be used to measure momentum in the stock market. The two that we are looking at today are the percent of stocks above their 200-day moving average and the percent of stocks where the 50-day moving average is above the 200-day moving average.  When these measures are over 80%, stocks are considered at overbought levels. When the two measures are both around 80%, recent history suggests that the equity market has run out of steam and markets have tended to drop.

Over the past six weeks there has been a noticeable surge in the MSCI Pacific as the percentage of stocks trading above their 200-day moving has skyrocketed from 46% to 75%. This momentum looks like it could carry on for a while as the percent of stocks where the 50-day moving average is above the 200-day moving average still has some catch up room.





Meanwhile in Europe, momentum has started falling from elevated levels, after peaking at the end of last year. This could be signaling a top has been put in place in Europe since the percent of stocks with the 50-day moving average above the 200-day moving average is also deteriorating from the 80% level at the same time.






Charts of the MSCI World and MSCI North America are below.

GBP Update

As we pointed out a few months ago (here), the British Pound moved into overvalued territory on a purchasing power parity basis versus the U.S. Dollar for the first time in five years:



For those who may have missed it, the currency made a new five-year high in the last week:



It remains to be seen whether exports will continue be strong enough to sustain the improvement in the U.K.'s trade balance:

NYSE Margin Debt Watch - A Tad Bit Higher In May

After margin debt dropped for two consecutive months in March and April, margin debt increased slightly by about $1.4 billion in May. However, the two month difference in marge debt remains negative about about $11.8 billion. With this slight increase in May, we are currently in a holding pattern to see if gross margin debt truly did peak in February. Net margin debt has held relatively steady since December 2013 which given its elevated level is a rare event over the past 11 1/2 years.

Divergences in European Manufacturing PMIs

Spain was the big winner in today's release of PMI Manufacturing data, while France (and Greece) were more disappointing:



The divergence between Spain and France-- and the implications for each country's industrial production, based on past correlations-- is quite striking:

MSCI Europe Mid-Year Check-Up

Performance by countries in the MSCI Europe has been led by Italy and Spain while the Netherlands has struggled the most:

On a sector basis, Utilities have gained the most while Information Technology stocks have faltered:

Digging deeper, constituents of the Gold and Biotechnology sub-industries in Europe have both gained more than 30% this year:

Conversely, Internet Retail stocks in MSCI Europe have declined by almost 50%-- largely in the last quarter alone:

The ten best and ten worst performing members of the MSCI Europe so far this year are:

Turning to a few indicators of internal market strength (or weakness), we find that the advance/ decline ratio continues to languish as the index gains:

Cumulative net highs have deteriorated since the beginning of the year while the index has continued higher:

The percent of issues in the MSCI Europe index that are above their 100-day moving average has fallen since January:

Net advances appear to be weakening:

Fewer constituents are outperforming the MSCI World:

And finally, by most valuation metrics, the majority of companies continue to trade at elevated levels: