ddcapitalfund

[ddcapitalfund]

GOP Playing with Fire as Potential U.S. Banking Crisis Looms

Josh Hawley joked about Silicon Valley Bank being "too woke to fail" last Thursday, joining Florida Governor, Ron De Santis and House Oversight Committee Chair, James Cormer in blaming "woke policies" for the bank's failure.

By Marco Di Dionisio

March 18, 2023

As expected, there is a rampant speculation regarding the factors at play in the looming U.S. banking crisis these days.

The question we should be asking, however, is how did we get here?

Was it the 2018 deregulation of financial institutions that the Trump administration passed? Was it the Fed's record pace of rate hikes? Was it a risky business model?

The truth is, all of things likely played a role. In the case of SVB, let's also add the selling to Goldman Sachs of a large bond portfolio, at a loss, in order to quickly shore up cash reserves. That alone, caused the stock price to tank, which further accelerated the bank's downfall.

Some politicians, however, are cherry picking from these factors to help push their party's narrative.

The GOP's ridiculous take that it was "wokeness" that brought on SVB's collapse was rightfully laughed at in financial circles, but there's nothing funny about what's happening here.

These situations are never binary, and treating them as such is not helpful when trying to establish a viable path forward. Even more so if it's being done with purely political motives.

There is almost always a series of factors at play when qualifying events like these materialize, and pushing silly theories to score cheap political points signals a serious lack of understanding of the situation, both in terms of identifying the causes as well as in providing plausible solutions. 

It's difficult, however, to find plausible solutions when you have an opposition party hoping in disastrous economic data so that it can use it to attack the governing party.

It's the old, "Party before Country" adage, at its finest. But in this case, it's downright dangerous and irresponsible.

There's another old proverb that comes to mind here: "If you play with fire, you get burned".

[ddcapitalfund]

Bank Runs and the New Challenge for the Fed

Things have changed drastically this past week, and not just for the Fed. The banking situation potentially changes the cards on the table for the Fed and its inflation fight.

By Marco Di Dionisio

March 17, 2023

It looked as though the turmoil in the banking sector was beginning to settle down after news of troubled banks getting some support. However, markets opened in the red this morning as investors try to understand the extent of the problem and whether we'll really be able to climb out of it unharmed.  

Much will depend on what the Fed ultimately decides on rate hikes next week. The situation facing the Fed and its path forward has changed considerably since the banking issues arose. We went from being worried about the number and scope of future rate hikes, to worrying about a bank run that, for a minute there, looked as if it wanted to spill across the Atlantic into Europe. By the way, it still can.

But let’s look at the events that brought us here. First, SVB and Signature Bank failed due to bank runs (depositors withdrawing more than the banks could pay out using cash reserves). In SVB’s case, after selling bonds at a loss, the stock price tanked and depositors panicked, leading to the most classic of bank runs.

Then Credit Suisse entered the picture after its top shareholder, the Saudi National Bank, ruled out providing the Swiss giant with fresh funding because of regulations that cap its stake at 10% (it currently holds 9.9%).

Then it was First Republic Bank’s turn, as it was also subjected to a bank run and began teetering. Eleven U.S. banks stepped in last night and provided First Republic with $30 billion in deposits to alleviate some of the most immediate concerns. Banks are rightfully defending their own, in an attempt to avoid the entire sector from being dragged in.

We're not, however, out of the woods yet by any means, as regional banks are still showing vulnerability and the Credit Suisse and First Republic situations still need to play out.

That said, if the situation does calm down, we'll be go back to obsessing about the Fed. Next week (March 22 at 2pm eastern) the FOMC will release its decision on interest rates. The big debate is whether they will raise 25 basis points or take this opportunity to pause.

The bank situation does provide them with a bit of cover and the opportunity to do so, if they choose. Would pausing now send too strong a signal? Will markets take it as a reason to panic? Or would continuing with the hike, albeit small, trigger worries about the smaller banks ability to cope with higher rates at a time when they are already on the brink?

These are all legitimate questions which the Fed will have to parse through before making its decision next Wednesday.

No matter what they decide, the outcome could be very different than it likely would've been just a week ago. Everybody has been waiting for dire economic news so that the Fed can slow or halt rate hikes and eventually even return to cutting rates.

The narrative has been that equities would rally on the news of a slowdown or pause in rate hikes. Now, however, they may not. Whether the Fed pauses now or in the following FOMC meeting, it could be doing so for all the wrong reasons.

It'll no longer be about the Fed having some leeway because inflation is coming down and the labor martket finally cooling off (it’s not, by the way). It could end up being about the Fed having to temporarily pivot from reducing inflation to fending off a financial crisis.

Although we are nowhere near the conditions which led to the Great Recession in 2008, we have seen this week the destabilizing effect that panic can have on account holders and how quickly it can escalate into potential bank runs.

The Fed has an even trickier road ahead than before, and what we have to hope for is that it doesn't eventually find itself cornered into a "doomed-if-you-do, doomed-if-you-don't" scenario.

Is there a silver lining? Well, the AAII sentiment survey is showing growing bearishness in investors. Bullish opinions dropped from 45.2% to 40.3%. Why is this good? Historically, the S&P500 has posted above average returns in the six to twelve months following an unusually bearish reading of the AAII. This wouldn’t only be good for stocks, it would imply that the turbulence in certain sectors of the economy, in general, is on the mend. With uncertainty reigning supreme, that’s all we have to hang our hats on, for now.

[ddcapitalfund]

Pain Trades. How and Why they Happen

The market has a knack for frustrating as many traders as possible, at the same time. We may be seeing that play out right now.

By Marco Di Dionisio

March 6, 2023

Financial markets have a way of frustrating traders, we all know that. But there are times when too many market participants are positioned in one direction, and “the market” takes note. 

When this happens, the market often enters into what’s called a “Pain Trade”, which is when stocks go in the exact opposite direction as market participants expect.

In the case of what is happening now, the market may have had too many people positioned for a pullback during the first quarter of 2023. This was based largely on predictions of television pundits and financial media, in general. 

As a consequence, there were many that were either short the market, or sitting on cash. Instead, the S&P500 has gone up almost 8% this year. And when the market goes against such a high number of traders positioned for volaitility, what can come of it is a very sharp rise in stocks, frustrating the largest possible number of people.

And as this frustration plays out, the shorts cover their positions, sending stocks even higher, and the same happens with those sitting on the sidelines who are suddenly overtaken by FOMO (fear of missing out) and enter long positions. Both of those things create and often exacerbate a “pain trade”.

In watching market headlines this morning, many financial institutions are now claiming that this bounce has legs. Some are calling for upside to 4200 (August 2022 highs), other are calling for 4600 (March 2022 highs). From a technical perspective, the S&P500 is following through on Friday’s bullish candle and is currently above all short term moving averages (the 8dma and 21dma are my focus), which would indicate, at least, some further short term upside.

This may explain why the rally can continue. Why? Well, even though they’re not saying it directly, the truth is that those making these calls believe there are still enough people out there grappling with FOMO to send stocks even higher.

Hence the pain trade. Are we in one now? It sure feels like it. With Wells Fargo among the several institutions saying this morning that the market can continue to go up, there are also those making a “Bull Trap” call, meaning they believe the market is currently drawing in as many late bulls as possible, before reversing lower and once again, catching many wrong-footed traders off guard.

This is not only possible, it could lead to the creation of another pain trade, in the opposite direction. And keep in mind that this week’s job report could add fuel to either side of that trade. Fun times.

[ddcapitalfund]

China’s Reopening, Boon or Bane for Global Markets?

Following the economic hardships brought on by its Zero Covid policy, China’s economy is finally reopening, but there are ongoing debates as to whether it will help or hinder the global fight against inflation.

By Marco Di Dionisio

March 3, 2023

China is just now emerging from three years of harsh Covid-driven policies, including the most recent “Zero Covid” regime which shut down the country entirely, as the rest of the world was reopening. As China now begins to return to normal, there are many diverging opinions as to what that will bring.

All one needs to do is to look at recent headlines coming from major hedge funds, financial institutions and the press, many with opposing takes on what it means for the global economy. Let’s take a look at some of them.

Goldman Sachs: “China’s Reopening could Drive Stocks up 20%”.

Wall Street Journal: “China’s Reopening Complicates Global Fight Against Inflation”.

Barron’s: China’s Reopening Unlikely to Spark a Surge in Commodity Prices”.

La Salle: “Reopening brings clear positives for the Chinese economy and its real estate markets, though the risk of a renewed rise in global inflation should be watched”.

Reuters: “China Reopening is a Mixed Blessing for Inflation”.

Blackrock: “The boost from this year’s restart will be a one-off, just as we’ve seen elsewhere in the world. So, attention should also be on what comes next. And we expect longer-term growth to be significantly slower than before the pandemic”.

As the headlines make clear, there is no widespread consensus on whether the reopening of China’s economy will bring more good (growth and exports) or bad (inflation) to the global fight against rising prices. 

As in many cases, the truth probably lies somewhere in the middle, however, it is hard to argue against the fact that, after the almost total shut down of an economy the size of China’s, we are likely to see the return of some inflationary factors that Central Banks have worked so hard to stave off.

China’s economy was crippled by its “Zero Covid” policies, dropping GDP from 8.1% in 2021 to just 3% this year. The country’s announcement of drastically loosening restrictions on Dec. 7th is likely to be welcomed by most Central Bankers, however, there are some concerns that it could, in the long run, make their fight against inflation more complicated.

The key could be oil prices. As consumption ramps back up on the Chinese mainland, demand for oil is also likely to increase,  driving up prices. Oil has played a major role in inflation as the war in Ukraine exacerbated an already dangerously high inflationary period just as Central Banks around the world were scrambling to reverse years of low-to-zero interest rate policies in an attempt to quell a global rise in prices.

Also, Russia announced on February 24th that it is cutting its oil production by 500,00 barrels per day (roughly 5% of its total output) in an attempt to retaliate against Western sanctions. The move could further exacerbate supply constraints in the oil market, which had so far, largely ignored the disruptions in Russia’s oil industry.

Add to that some seasonality that favors a rise in prices at the pump. Summer normally sees an increase in gas prices as the travel season ramps up. This, along with an inevitable spike in demand for oil coming from China, adds to the factors lining up that could make the Federal Reserve’s job of trying to crush inflation, through record hikes in interest rates, that much more difficult. 

What are the positives of China’s reopening? As Stella Yifan Xie writes for the Wall Street Journal, it will inevitably lead to an improvement in supply chain bottlenecks, which is likely to ease some inflationary pressures.

Growth is sure to get a boost from renewed Chinese participation in the global economy and we’re already seeing a resurgence in manufacturing in Asia due to a gradual recovery of Chinese demand and investment appetite. How long this boost will last, however, is the real question.

Whether China’s reopening will lead to long term inflationary effects is still to be seen, however, it is likely to complicate matters for Central Banks that are taking extraordinary measures, like the Fed, to quell a global rise in prices. 

Whether the positives of China’s reopening can outweigh the negatives is yet to play out. And while oil isn’t the only commodity that could see a spike in prices, it is one that, as we saw following the start of the war in Ukraine, is capable of playing its part and adding fuel to an inflationary cycle that much of the world is desperately trying to put in its rearview mirror.

[ddcapitalfund]

S&P 500 Still Within Falling Wedge on the Weekly Timeframe

The S&P looking to break out of a nine-month descending channel

By Marco Di Dionisio

July 16, 2022

The S&P500 has been stuck in a falling wedge/channel for the last nine months. While falling wedges are often bulilsh, like all chart patterns, they does require confirmation.

Although the index closed out the week in the red, the S&P is once again bumping up against the top end of the channel. Bulls will be watching the action next week to see if, this time, it’s able to break out and have an upwards bounce with some real follow through, something we haven’t really seen since the bear market began.

The VIX (volatility index), on the other hand, is now at the bottom of its current range and touching multi-month lows. How long will it stay down? 

Aside from the technical aspects, there is still much headline out there. Rising inflation and the prospects of Fed tightening and a possible, looming recession, are all things that can derail markets at any moment.  

It’s time like these when, more than ever, it’s smart to wait for confirmtaion on any chart patterns and to keep positions nimble and stops tight, at least until we get back to more stable and tradable price action. 

Watching the S&P and VIX next week could provide a clearer indication of whether this late week strength has legs.

Meanwhile, as we frequently always like to remind our readers, cash is a legit position until traders feel comfortable dipping their toes back in the water. 

[ddcapitalfund]

Not Just the Fed Removing Market Support

Bank earnings roil markets

By Marco Di Dionisio

July 16, 2022.

  Financial markets did not react well to the missed quarterly earnings reports of JP Morgan and Morgan Stanley on Thursday. Not only did the two banks miss on both revenue and earnings per share, but JP Morgan also suspended its stock buyback program.

This last point is particularly important since stock buybacks tend to provide a floor for stocks during pullbacks because the company itself buys back shares as the stock moves lower.

  JP Morgan’s decision to suspend its stock buyback, while sound considering the situation, takes away yet another instrument aimed at supporting the market. I use the word “another” because this comes at a time when the Fed is also making a major shift in policy, by applying interest rate hikes to counter inflation and reducing its asset holdings, both of which are seen as negative for equities. All of this means there is likely more pain to come in the short term. 

Both the markets as well as financial stocks recovered somewhat on Friday to close out the week, however, the Fed’s upcoming July 27th decision on interest rates, along with the inevitable lowering of earnings estimates in the coming weeks, could bring back volatility and a possible push for markets to revisit recent lows before a much-hoped-for stabilization in the second half of the year.

[ddcapitalfund]

OPEC’s Balancing Act

How US Shale and the Saudi Aramco IPO can influence OPEC’s stance on the price of oil this year

By Marco Di Dionisio

April, 1 2017

Saudi Arabia caused quite a stir few weeks ago when the release of February oil output numbers revealed that, after cutting production in January, it returned to increasing it in February. Oil prices took a hit on the heels of the report as some analysts believed the increase signaled a change of heart by the Saudis with respect to the cuts agreed to in late 2016. There may, however, be more to it than that.

The price of oil spiked 24% following OPEC’s announcement to cut oil production back in November. In the last three weeks it has given all of that back as we are now right back at pre-OPEC announcement levels. Have markets overreacted? There are several variables involved, some of which are pulling the oil market in opposite directions, and this is where it gets interesting.

Let’s take a look at some of the factors at play here.

Saudi Arabia cut production more than anyone else in January. As other oil producing countries caught up, Saudi Arabia was able to ratchet up its production a bit (10.01 million barrels per day in February vs 9.87 million in January) while still holding below its 10.06 million barrel per day quota. The Saudi Arabian Energy Ministry said that February’s output increase was due to “storage adjustments”.

The fact is, Saudi Arabia currently has some wiggle room in output numbers as many of its OPEC peers (mainly Iran, Iraq, Qatar and UAE) and, some non-OPEC producers, begin to cut output as well. 

Another factor to keep an eye on is that the rise in the price of oil has brought on a resurgence of US shale, which increased output at a much faster pace than anyone, including OPEC, had imagined. US crude production is holding above 9 million barrels a day according to recent EIA reports.  At the end of February, the Kuwaiti Oil Minister, Issam Almarzooq warned that increased US domestic production could lead to oil dropping back down to $45 a barrel.

Crude set a bottom of $47.09 on March 14 followed by a quick bounce. Price currently sits right below the $51 trigger on a weekly inverted head and shoulders break out that failed on March 8th.   

How much of a role the increase in US shale production played in the March drop in price is difficult to say, however, should US domestic output continue to rise at current rates, it would, indeed be capable of disrupting oil markets going forward. The Saudis and OPEC are clearly well aware of this. Some analysts believe an all-out showdown between OPEC and US Shale will be inevitable at some point down the road. 

Another important factor to keep in mind is that Saudi Arabia has a vested interest in keeping oil prices elevated in the near term….it’s called Saudi Aramco. The world’s largest company will soon list its shares on the open market with the IPO expected to be worth $100 billion for roughly 5% equity, potentially making it the largest IPO in history (see Bloomberg chart below).

The Saudis have been shopping around the IPO and many governments are scrambling to get a piece of the action. Saudi Officials have already received pitches from Hong Kong and Singapore, both of which could, allegedly, bring big money from mainland China to the table as well. Other possible listings mentioned by Aramco executives are New York, Tokyo, London and Toronto.

The price of oil at the time of the IPO will undoubtedly influence its success. For this reason, many experts believe Saudi Arabia will actively support oil prices leading up to the listing, as that will play an important role in the timing and success of the listing itself. 

Does this mean we can expect higher oil prices in the near future? This is the big question currently being debated and that is also at the heart of the Saudi dilemma of keeping oil prices elevated while, at the same time, attempting to curtail US Shale output.

On a purely technical level, crude quickly recovered from some substantial damage on shorter term time frames, while the long term trend is still down. There are technical signals, for traders, that point to higher oil prices in the near term. My distinguished colleagues at @seeitmarket, Joe Kunkle (@OptionsHawk), Mark Arbeter (@MarkArbeter) and Chris Kimble (@KimbleCharting) have published some excellent technical analysis on this in the last week. 

As for the Aramco IPO, we still don’t know when it will take place, although many expect it to be before the end of this year. Considering the size and importance of the IPO, it’s likely that Saudi Arabia will go out of its way to make sure the conditions for the listing are ripe when the time comes.

February’s output increase is not enough, on its own, to accuse the Saudis of reversing course on the OPEC cuts agreed to in November. Moreover, it’s difficult to imagine an all-out showdown between OPEC and US Shale taking place before the Aramco IPO. 

Some analysts believe the Saudi’s will provide a floor to the price of oil until the IPO takes place. Where that floor is in terms of price is yet to be seen. For now, a recent bottom has been set at $47. A level to keep an eye on in the near term for both US Shale and the Aramco listing.

Thanks for reading  

[ddcapitalfund]

Energy Sector Update from Last Week

May 7, 2016

Just a quick note to update my “See It Market” post from last week on the energy sector and, in particular, the XLE and XOP ETF’s.  

Weakness in energy continued this week following a strong run off the February lows. The question we asked last week was whether the sector is consolidating recent gains or rolling over. There seems to have been a change in sentiment although it’s still too early to say whether the uptrend is over. 

There are, however, some signs that can guide us in the short term. Different time frames are telling us different things at the moment so it’ll be important to keep a close eye on where and when price action resolves decisively in one direction.   

Let’s get right to the charts.

On the daily chart of the XLE, below, price action began to roll over at the end of last week and followed through this week. The 10 day ema was acting as support and, as is often the case, became resistance once it was breached on Tuesday. Despite daily attempts, the XLE was rejected at the 10day ema for the remainder of the week. Price then went on to breach the 20 day ema on Friday to close out an ugly week, which saw the ETF down 3.3%. The one bright spot is that it managed to hold horizontal support at $64.85. Further support below sits at $64 and then at $63.29 which is the 50 day ema. 

As for the weekly time frame, below, the XLE was able to hold on to the rising trend line despite the weak action in the sector. The bounce occurred right at the intersection of the rising trend line and the 50 week moving average. For now it is still within this ascending triangle. We’ll know soon if bulls have the conviction to push this back up and through the top of the triangle at $69 or whether it resolves lower and goes on to test the 2 and a half year downtrend line below.  

The monthly time frame, below, depicts a decidedly different picture. Here, as mentioned last week, we are still range bound within a declining channel despite the uptrend of the last two months. The XLE found support at the 12 month moving average but was unable to break above the upper end of the channel. Keep in mind that, ideally, we’d like MA’s pointing upwards before entering a trade with a bullish bias. The 12 month simple moving average is still reflecting the bear market that the energy sector has been experiencing since mid 2014. Although still early in the month, we still have much work to do on this time frame in order to give credence to the bull theory of a continuation of the recent uptrend.  

As for the XOP, Oil and Gas Exploration ETF, below, price breached its rising trend line and resolved lower on the daily time frame. We mentioned the beginning of this breakdown last week and, although it traded sideways after the break, it was not able to recover trend line. On the bright side, it did find support at the 200 day sma and went on to consolidate above it. We’ll see next week whether it attempts to reclaim the trend line or whether it continues down towards horizontal support at $31.30 which is also intersecting with the 50 day sma. Support there is strong and if it were to break that level we could see a retest of the 12 month down trend line. 

So we find ourselves once again in a period of chop. The strategy here depends on your time frame but the common denominator is the uncertainty regarding the continuation of the recent uptrend. There are signs of weakening in energy but much will also depend on the continued strength of the US Dollar. The recovery of the US Dollar, if it continues, will likely weaken the energy sector further so that is something worth keeping an eye on if you are trading energy related stocks or ETF’s.

Since time frames don’t align at the moment, it’s imperative to keep an open mind as to where the energy sector is headed in the short to medium term. Although the monthly time frame on the XLE still has much to prove, the daily and weekly charts have price at potential inflection points which should resolve in one way or the other rather soon. As always, wait for confirmation.

Thanks for reading

[ddcapitalfund]

Is Chile’s Stock Market About To Get Hot?

The setup is in place for a breakout of long-term significance in the Chilean market.

We continue this week’s trot around the globe by heading to South America to spotlight one country’s stock market that been on our radar for some time: Chile. When we look for breakouts, there are a few things that we like to see. The obvious one is the actual point at which price breaks above the significant resistance, be it a prior top, a trendline, a moving average, etc. The less obvious and underrated factor is the initial setup leading up to the breakout. Take a look at Chile’s IPSA Stock Index, for example.

Currently, we see the IPSA arguably moving above the Down trendline that has been in place since 2011, as well as the 1000-day (200-week) moving average. If successful, this could mark a breakout of significant proportions for the Chilean stock market. The kicker, however, comes in the setup.

When we say “setup”, we mean the circumstances surrounding and preceding the breakout. What makes a setup a “good” one? In our view, there are several factors. We will deal with two here, as demonstrated by the Chile IPSA Index. First off, the level from which the breakout move is launched is important. And the more significant the level, the better the odds of a successful and substantial breakout.

For example, witness the level from which the IPSA bounced in January prior to its current “breakout”. This level – around 3400 – was meaningful for a variety of reasons, including:

It marked the former all-time highs in 2007 and briefly in 2009.

It marked, at the time, the position of the Up trendline connecting the 2002 and 2008 lows.

It marked the 38.2% Fibonacci Retracement of the rally from the major low in 2002 to the high in 2011.

It marked the 61.8% Fibonacci Retracement of the rally from the major low in 2009 to the high in 2011.

As you can see, that was some seriously heady stuff at the level of the previous low. Why is it important that price bounced from a consequential spot like that?

Major chart levels – like magnets – tend to attract prices, eventually. Thus, if an important level has not yet been tested, that possibility will continue to hang in one’s consciousness until it occurs. Therefore, if the odds are that prices will test a certain level, it is best to “get the test over with” and out of the way so that prices can commence their next journey. And given the major importance of the particular level, the odds of it “holding” are very good – meaning that that next journey should be higher.

(One example of an index that has recently bounced without yet testing a key level below is the Indian Nifty, which we highlighted on Monday).

So we know that the level from which a breakout move is launched is key. Secondly, the manner in which the level is tested can also be of importance. Ideally, we like to see a level tested – and re-tested – in order to support the view that prices are ready to reverse – in this case, move higher.

If a level has seen multiple tests, that suggests a better base or more complete bottom process is in place. In the case of the IPSA, prices tested the key 3400 level on 2 occasions, January 2014 and January 2016. Thus, it has potentially put in a solid base, or complete bottom process (or double-bottom).

Therefore, we have 2 key ingredients in place for a potentially more successful and robust breakout: 1) a major level off of which the breakout move was launched, and 2) a comprehensive test of that key level prior to liftoff. All that is left now is for the IPSA to convincingly break its 5-year downtrend.

And just to get ahead of ourselves a little bit here, the potential upside for the index could be massive. In our view, the IPSA likely launched a secular bull market in 2002, with 2 up waves complete (2002-2007 and 2008-2011). If the 2011-2016 formation in the IPSA is merely a consolidation pattern to digest the 2008-2011 gains, the next (and final?) up wave should send the market to new highs – and perhaps considerable new highs at that.

But first things first. The setup is in place. Now we wait for price to break out, which may now be underway. If it is successful, Chile may become one hot market indeed.

_________

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[ddcapitalfund]

Are Sovereign Wealth Funds Roiling Global Financial Markets? via “See It Market”

Marco Di Dionisio

February 15, 2016

Investing Research

We’ve all been witnessing incredible selling pressure on financial markets all over the world, with new multi-year lows showing up in equities and various asset classes. After years of relentless bull market action, we’re seeing a substantial change in the way that markets behave. Given that corrections are a normal part of market dynamics and trends, there is something to be said regarding the circumstances surrounding the recent price action.

The one question that many investors have been asking as of late is how did equity markets become so closely correlated with the price of crude oil?  Enter Sovereign Wealth Funds into the picture.

We know that the price of oil effects manufacturing, the job market, currencies, transports, etc. We also know that all of these things can have an impact on markets, but in the last 9 months, equity prices and oil prices have been tightly correlated, sparking curiosity in many market participants. I will attempt to provide one of the scenarios that may be responsible for the recent correlation between the equity market and oil prices.

There has been some recent speculation regarding large sovereign wealth funds (SWF’s) heavily liquidating assets. If true, it’s not difficult to imagine which ones are doing the selling. Those representing oil producing countries, which are funded by revenues from oil and gas sales, are likely shedding positions, especially riskier ones, to make up for lost revenue from energy.

Let’s take a look at a few reasons why sovereign wealth funds from oil exporting countries may be disbursing assets.

First, what exactly are sovereign wealth funds?  They are state owned investment funds investing in a vast array of assets, from stocks to bonds, currencies to real estate to precious metals, etc.

While Sovereign Wealth Funds invest in a range of financial assets, they all naturally have the objective of maximizing the long-term return from their investments. Although the portfolios of SWF’s are generally well diversified, the chart below shows the important role played by their exposure to oil and gas related assets.

Following the financial crisis of 2008, sovereign wealth funds have grown into very powerful entities, with an enormous influence on financial markets. The substantial financial resources at their disposal (also thanks to billions of dollars in revenue from energy related sales) have allowed sovereign wealth funds to take on a central role in financial markets in the last eight years.

The drop in the price of oil, however, is now beginning to take its toll on those that benefitted from high energy prices over the years. Analysts at RBS calculate that the boom years brought in roughly $700-800 billion to oil producing countries, much of which was being reinvested in global financial markets, much of which in equities. The current slide in oil prices, however, has reduced those revenues to roughly $200-300 billion. The plunge in the price of oil has not only hit U.S. shale plants, but has also rocked global markets, which are witnessing a drying up of liquidity compared to recent years.

As you can see from the table above, the amount of assets amassed by SWF’s is truly extraordinary, and the hundreds of billions of dollars they’ve been pouring into equity markets are being slowly curtailed due to tumbling oil prices. With crude hitting twelve year lows in the last two months, the inflow of liquidity deriving from oil and gas sales by producer nations into equity markets has dried up and the markets are feeling the effects.

As of March 2015, global SWF’s amassed $7.1 trillion in assets under management, according to the Sovereign Wealth Fund Institute (SWFI), up from $3.4 trillion at the start of 2008. Of total assets around the world, an estimated $4.29 trillion came from oil and gas SWF’s which are funded, as mentioned before, by revenues from energy exports. These types of funds are designed to act as a buffer to oil price volatility, as currently seen in markets, but has it worked?

The 76% drop in crude oil prices in 2014-15 has created several problems for energy exporting nations. Many here in the United States have been expressing concern on the effects on our fracking infrastructure, and rightly so. They sustain that the larger OPEC countries are purposely refusing to cut output so as to maintain the oil glut and keep prices suppressed.

The consequent tumbling in oil prices does indeed create major problems for American energy production, hindering it from providing competition on international markets. As mentioned before, major oil producers are also taking a hit from current price action.

Let’s take Saudi Arabia as an example. The Saudi’s have refused to cut production several times in the last 18 months. They too, however, are feeling the pinch of its alleged orchestration in keeping oil prices depressed. While the effects are by no means devastating, Saudi Arabia’s current public finances are expected to show an $87 billion deficit after years and years of generous surpluses.

In order to cover that hole, the Saudis will be forced to sell debt, liquidate assets and effect privatizations. The process started in 2015 when Saudi Arabia’s foreign currency reserves fell by $73 billion due to major asset liquidation from one of its sovereign wealth funds, Sama Foreign Holdings.

It’s the size of these SWF’s that makes them so dangerous to market stability. While a disbursement of a few hundred million dollars may be capable of hitting an individual stock, especially one with low liquidity, it’s not enough to cause a meaningful impact on general markets.

With total current assets estimated at $4.8 trillion, however, it’s not hard to imagine how liquidation by these funds can rock markets in a big way. Think about it: a mere 6% reduction in such assets equals $288 billion in outflows from international equity markets! Now that can, indeed, provide a very substantial hit.

When turmoil like the one we’re now experiencing hits financial markets, there can never be simply one reason, and this case is no exception. We currently have an alarming plethora of factors causing the current downturn, from China’s numerous woes to the tumbling price of oil, from the emerging market debt crisis to global deflationary pressures, from the growing absence of liquidity to a worldwide economic growth slowdown and, last but not least, ZIRP (zero interest rate policy) and NIRP (negative interest rate policy) being implemented by many major central banks in the wake of a global currency war scenario.

That being said, there is a very specific and implosive effect caused by the drop in oil prices for countries that produce and export it. While the shedding of positions on behalf of sovereign wealth funds adds to many other factors mentioned above, the liquidating of assets by such enormous funds can, by itself, move markets in ways that were unimaginable before the SWF’s of oil producing nations grew into the behemoths they have become today.

This is not to say that sovereign wealth funds are facing demise. Most of them have been diversifying over the last two years in an attempt to curb losses from the oil price slide, but the sell-off is nevertheless putting the hydro-carbon based pools of capital through a strenuous test, and equity markets along with them.

The unwinding of this situation will not be an overnight affair. While SWF’s have maintained exposure to fixed income asset classes and forex markets, it will likely take an extended period of oil price stability (and gradual price increases) to get the finances of energy producing countries back on track and their sovereign wealth funds to return to investing in equities at previous levels. One possible intermediate term result is international financial markets being subjected to prolonged periods of volatility until this process plays out.

Thanks for reading.

[ddcapitalfund]

Who Is On The Ropes Now…Bulls or Bears?

[ddcapitalfund]

Today, it begins

Around the same time every winter I have the great fortune of getting together with a small group of ex-colleagues/friends from Hedgistan in an undisclosed mountain location for skiing and the best hot chocolate on the planet. And market talk. Lots of market talk.

It always ends up bearish. I don’t know if it’s the calendar or some kind of perverse self-selection process, but by the time we’re ready to head home it seems that the end of the world is always nigh. And, just as regularly, the trip is usually followed by a short-term market bottom. Let’s hope that happens again this year–or I’m going to have get a bigger bunker.

Market topics this year ranged through the ones you’d expect: Chinese capital flight, profit margin reversion, US recession/no recession, income/wealth inequality, technology and globalization. Honestly, fun and stimulating though it was, we came away with no iron clad answers. Except one.

As you’d also expect, we talked a bit about oil as well. What would end the bear market? Would Saudi and Russia combine forces and reduce supply? How quickly can shale producers turn production on and off? But on this subject we came away with an answer, something wiser (not smarter, wiser) market types have been susurrating for several months: the supply pressures won’t stop until debt-financed production becomes equity-financed production. It really is that simple.

The reasoning is clear: We know you can’t hold back production to get higher prices later if you have debt to service. Only equity financed production has that luxury.

The process is also clear: The highly leveraged producers drown each other with supply in an attempt to be the last man floating, but ultimately all sink. The equity holders get wiped out and the bond holders become the new equity holders in exchange for writing off their debt claims. Sometimes the new equity holders sell their claims to others in the process. Sometimes they hold on. But either way the new owners have made time their friend instead of their enemy.

This debt for equity swap is the sine qua non for swing production to begin the long awaited, over forecast pull back in supply.

Did you see what just happened to the stock prices of Chesapeake Energy and others producers of its ilk?

The process started today.

NB: I am not saying buy oil today, that oil will be a moon shot, or that the process will be rapid or clean. In fact, the ability of shale producers with today’s technology to ‘turn the spigots back on’ very quickly should dampen any large upward thrust in the price of crude. ‘L’ is still more likely than ‘V’. But at least it begins the process. And maybe with it we can hope against hope that the correlation between crude oil and other risk assets can begin their process of reverting to their means.

Bring on the bankruptcies.

[ddcapitalfund]

Euro PIIGS Starting To Squeal Again

The stock markets of the so-called PIIGS are breaking down on an absolute and relative basis – not a positive development for global markets.

The PIIGS are starting to squeal again in Europe. No, not the kind that produces pancetta or linquica or bangers. We are talking about the continent’s debt-laden, economically-challenged countries known by the acronym PIIGS, namely, Portugal, Ireland, Italy, Greece and Spain. These nations are essentially economic dead weight for Europe considering their plight. That said, all financial markets are cyclical – nothing straight-lines. And indeed, despite the apparent inevitable downfall that awaits the Eurozone as a result of the PIIGS, the associated equity markets have actually been quite buoyant for the better part of the last 4 years. Not so anymore.

We have posted before a composite that we constructed consisting of equally-weighted portions of each of the PIIGS’ stock markets. We call it…the PIIGS Composite. The composite starts in 2006 and hit an all-time low in June 2012, amid the Europe/PIIGS near-meltdown. Following Mr. Draghi’s “whatever it takes” moment, the PIIGS Composite shot up off the mat, rallying nearly 75% in 3 years before peaking in May of last year. Since then, the composite has gradually leaked lower. Around the start of the year, the leak turned into a gusher. As of this week, the PIIGS Composite is at near 3-year lows, approaching levels last seen in 2012.

The Composite weakness is not just significant on an absolute basis. As the chart shows, it is also breaking down on a relative basis versus the DJ Euro STOXX 50, a proxy for the more established, “blue chip” stocks in Europe. Like all higher-beta sectors, stock market bulls want to see the PIIGS outperforming the lower-beta blue chips. That can be an indication of a willingness of investors to take on risk, a healthy condition for a bull market. In other words, when the PIIGS are outperforming, it is symptomatic of a “risk-on” environment. Conversely, when they are lagging, it is a sign of “risk-off”.

As the chart indicates, risk-off is decidedly the case at present as the PIIGS:STOXX 50 Ratio just broke sharply lower, through a shallow year-long uptrend. Looking at prior trend breaks in the ratio, e.g., mid-2008, late-2009, and mid-2014, we see that substantial bouts of weakness ensued throughout European markets, particularly in the PIIGS. These also led to scares among some or all of the PIIGS pertaining to their economic viability.

This is not a pretty situation shaping up for the Eurozone once again. Whatever benefit that accrued as a result of “whatever it takes” may have largely run its course. Again, it will not be a straight line lower. However, the absolute and relative breakdowns in the PIIGS Composite suggests that the post-2012 run-up is over. Thus, while the PIIGS rally of the past several years may have tasted like Jamon Iberico and Prosciutto di Parma to investors, they may have to settle for scrapple and spam from any rallies in the near future.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[ddcapitalfund]

New Lows Hit ‘Wash-Out’ Territory

The number of New 52-Week Lows on the NYSE has reached levels historically consistent with a ‘washed-out’ market.

Just a week ago, we penned a piece called “Complacent Correction Cause For Concern?”. The premise was that, at least according to the S&P Volatility index (VIX), the level of fear in the market was not commensurate with the magnitude of the stock decline. In fact, the VIX was at the lowest level in its history during any such corresponding S&P 500 decline. Our takeaway was that until signs of fear and capitulation began to materialize, more downside risk remained in stocks. Sure enough, the market has continued to crater since then. However, we may be starting to see signs of capitulation – or, “wash-out” – that could suggest the worst of the selling pressure is almost behind us (for now).

What are these signs? One source of potential clues is in the breadth, or internals, of the market. At times, a massive skew in the level of declining issues or volume versus advancers can signal a tipping point whereby market participants demonstrate a near-unanimous desire to “get out” of the market at the same time. Such capitulation often appears at the end of significant selloffs. We saw an example of such a wash-out day on August 24 of last year as the internals were historically skewed to the negative side.

The internal skew signal can also be found in the ratio between New Highs and New Lows on an exchange, or merely just the level of New Lows. An abundance of New Lows can signal a washed-out market whereby most participants have already sold and little immediate selling pressure remains. We wrote about this series yesterday as the New Lows on the NYSE registered at least 15% of all issues on the exchange for a record 8 consecutive days. Well, you can extend that record to 9 days with today’s reading. Furthermore, by any historical measure, today’s reading on NYSE New Lows hit true washed-out levels.

Consider this: there were 1410 New Lows on the NYSE today. That is the 6th largest total in history (going back to 1970). And outside of the 2008 financial crisis, it is the single highest reading ever. As a percentage of total issues, it is equally extreme. At 43% of all issues, today marked just the 16th day since 1970 with over 40% of all issues hitting New 52-Week Lows.

As the chart illustrates, these 40% New Low days have normally occurred near the very bottom of substantial declines. These include major lows in 1970, 1987, 2008, 2011 and August 2015. Here are all 16 days that hit the 40% mark since 1970.

Date          % Issues At New Lows 5/14/1970     47% 5/21/1970     54% 5/25/1970     56% 5/26/1970     58% 5/21/1973     47% 5/30/1973     71% 10/19/1987   50% 10/20/1987   58% 10/6/2008     54% 10/8/2008     60% 10/9/2008     55% 10/10/2008   75% 11/20/2008   47% 8/8/2011       43% 8/24/2015     40% 1/20/2016     44%

Of the 15 previous occurrences, all resulted in higher prices in the S&P 500 1-2 months later except for the earlier events in 2008. So this is one data point that would argue for an intermediate-term bounce over the next few months. Longer-term, the returns are even better, with 12 of the 14 showing a positive 1-year return, at a median of +21%.

However, like yesterday’s post, there is a caveat. The only failures over the subsequent 1-year period were the 1973 instances. And while the vast majority of occurrences led to 1-year gains, the 1973 setup perhaps most closely resembles our present circumstances. At least, that one and the August 2015 occurrence.

Why? The other 13 occurrences saw the S&P 500 a median of 30% off of its high. The 1973 and August 2015 events occurred while the S&P 500 was about 11%-12% off of its 52-week high. Where are we now? Just over 12% away from the S&P 500′s 52-week high. The point is that the other 13 occurrences were arguably more washed-out on a longer-term basis. The fear is that our present case ends up more like the 1973 version in which the S&P 500 proceeded to drop another 40% over the following 18 months of a cyclical bear market.

So the good news for bulls is that some signs of capitulation are beginning pop up. Thus, we would not be terribly surprised to see the pendulum swing to the bulls favor, at least over the short to intermediate-term. However, beyond that, the troubling longer-term warning signs remain, including perhaps an ominous 1973 analog.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[ddcapitalfund]

JA Solar Forming a Nice Cup

I wrote a blog post recently on trading cups with handles on weekly charts as one of my favorite set ups. I’ve been watching this 22 week cup develop for several weeks now. It has begun to form the handle with nice tight action on light volume as the stock begins to trend downward. 

The pattern looks to be forming nicely although the trade is not actionable yet and will require more time to see if it gives us a viable entry.  

The cup’s peak is higher than the top of the handle, which will require a substantial break out above the neckline for it to trigger. In this case the level is $10.80, which also happens to be the 52 week high.  

The handle, however, will need to come in for a few more weeks. Ideally, I’d like to see it correct another 5-8% to roughly the $8.50 area before breaking higher. We’ll need some help from Mr. Market going forward but keep your eye on how the pattern develops in the next 5-6 weeks. 

These types of trades require time and patience. It’s possible to follow a pattern like this for months just to see it fall apart at the very end. When I spot cups like this I add them to my journal and check back on them regularly. They don’t always materialize but when they do they can give you some very substantial upside for a profitable trade.

Thanks for reading.  

Follow me on Twitter and Stocktwits @DDCapitalFund

[ddcapitalfund]

Trading Cups with Handles 101

Cups with handles are one of my favorite chart patterns to trade. There are plenty of good set ups out there but I find cups with handles to be particularly simple and effective. They are also one of the more common chart patterns. The shape of the cup with handle formation is exactly what it sounds like, a cup with a handle. As a fan and student of the William O’Neil school of thought I like to trade them on a weekly time frame using nothing but price, volume and a 10 week moving average.

These pattern can be wide, generally ranging from a couple months up to eighteen months. While the depth of the cup (from peak to base) can vary, there are certain characteristics I look for in the handle. I like to see tight action as it forms in a downward slope into roughly 5-15% of the cup’s base. It’s possible to trade horizontal handles but I prefer those with a partial retrace of the cup formation. Handles that wedge upwards from the neckline, on the other hand, tend to lead to unreliable break outs and, in my system, invalidate the pattern.

The base of the cup is important as it allows the stock’s price to go through some corrective action before resuming an uptrend. You generally want to look for a decrease in volume as the stock forms the lower portion of the base. 

Cups with handles are particularly useful when trading growth stocks but any stock chart that respects the criteria is actionable. Whatever the stock, it should be formed during pullbacks in a bull market as cups formed in bear markets tend to be more prone to failure. 

Another thing to keep in mind is how much the stock is correcting relative to the general market. Be careful with those that correct over 30% as they tend to fail more often on break outs. You don’t want the stock to correct too much more than the general market as it can get you into a hole that’s too deep to dig your way out of. 

Volume is important in deciding your entry and exit points. As we mentioned earlier, you want to see a volume decline during the forming of the cup’s base while, on the other hand, make sure volume is spiking upwards (relative to previous weeks) on buy and sell signals.

Once the handle has formed I wait for the break out and look to enter the trade once price spikes above the cup’s neckline. I rarely buy the first break as I prefer to wait for the follow through weekly bar. After that I let the stock ride and buy the successful back tests of the 10 week moving average as price goes up.

As far as choosing exits, I look for specific situations that tell me when it’s time to bail on the trade. I normally use average true range (ATR) stops to trail and exits trades, and I still think it’s one of the best tools available in helping you establish a stop loss. When trading weekly cups with handles, however, there are several other signals that can be used to get you out. Some of these are climax tops, blow off tops, breaks above steep rising channel trend lines and a weekly closing breach of the ten WMA accompanied by a substantial increase volume. Remember, if you are not managing risk in your trades you’re simply engaging in a glorified version of gambling and severely hindering your trading account’s longevity.  

Let’s take a look at a few charts for some visual examples. 

Above is a weekly chart of Apple with a 33 week cup and handle. It’s not a perfect cup set up as most of the action forming the cup’s base is below the 10 week line. Also, there is a substantial, high volume shake out in the handle. I generally prefer to see a tighter, less volatile range during the decline that forms the handle. Nonetheless, the break out of the pattern proved successful in this case. 

The great thing about these formations is that you don’t enter the trade until the handle is complete and the stock breaks above the cups neckline. Even if there are a few characteristics that you wouldn’t generally want to see in the building process of the cup, you have the time to wait for confirmation.  

Notice how the volume on the Apple chart decreases during the basing process. This is ideal. The first buy point had a sharp spike in volume to back up its legitimacy. As I mentioned earlier, a successful weekly back test of the 10 week moving average is a good place to add shares. The sell signal comes on two parallel red bars where the second bar breaches the 10 WMA on increasing volume. 

One quick side note on the Apple chart is the failed cup at the upper right hand portion of the chart. As you can see, the handle broke down and retraced the entire depth of the cup. Stay away when you see this as it invalidates the pattern.

Here we have a weekly chart of Netflix with a 31 week cup with handle. The handle is close to perfect in terms of tight action and the amount of the cup it retraced. There is an enormous thrust in volume on the break out giving you a clear buy signal as price breaks above the cup’s neckline. There is also a doubling of volume on the first back test of the 10 WMA, which is a good place to add shares. You then have an easy sell signal five weeks later with a reversal signal confirmed the following week by a larger bearish engulfing bar and an increase in volume that closes the week below the 10 WMA.

This Intel weekly actually gave us two actionable set ups. The first one is a large 48 week cup with a laborious break above the handle. In this case, the buy signal triggers five weeks after the completion of the handle.  The huge volume during the forming of the cup’s base was a concern for me as I watched this pattern develop, and although it didn’t compromise the trade in this case, always keep an eye on volume.

You’ll notice that the buy signal could also have triggered earlier, on the week of Sept. 16.  I instead chose the back test as it was coming from four consecutive weeks of rising volume whereas the initial signal on the Sept. 16 week had declining volume relative to the prior week. As it turns out, either one could’ve worked in this case. Ten weeks later there was an add signal followed by a blow off top pattern four weeks after that.

The second cup is a 16 week pattern that led to a much steeper break out acceleration with simple buy and add signals. The sell comes off another parallel red bar pattern (like in the Apple chart) backed up by a large spike in volume.

Ambarella has a 21 week cup with handle with very clean signals. There is tight action in forming the handle which is what you want to see. The break out of the handle took a couple weeks to trigger but once it did a very strong uptrend materialized. The shakeout in February is a bit tricky as there was a slight increase in volume whens it lost the 10 week moving average.    

Even if you exited trade, there was a clear signal to re-enter on the week of March 2nd when volume more than doubled on the follow through week where it reclaimed the 10 WMA. The sell signal was the week of June 8th where volume increased substantially as the stock broke above a steep ascending channel line.   

Trading cups with handles on weekly charts requires a tremendous amount of patience as they form over long periods of time and may take months before an entry trigger materializes. It may also take months for your trade to play out. Remember, the forming of the cup’s base and the downward sloping handle are meant to scare off weak hands and make speculative traders lose interest in the stock. One thing you never want to do, however, is attempt to anticipate a buy signal. Let price come to you. This is true for all trades. 

A great way to find these types of set-ups is to check for charts with cups forming and add them to your journal. Check back on them over time to see if any are setting up for an actionable trades.

Weekly cups are what work best for my process and style but they can be traded on any time frame. Many traders have other successful methods for trading cups with handles. Your choice will depend on your own process, patience and trading style.      

If you like what you read here I recommend picking up a copy of William O’Neil’s excellent book, “How to Make Money in Stocks” on the CAN SLIM trading methodology. It begins with 109 charts of cup with handle patterns and continues with an in depth analysis that goes into much more detail on how to trade them than I do here. 

Thanks for reading.

Marco Di Dionisio

Follow me on Twitter and Stocktwits   @DDCapitalFund

[ddcapitalfund]

A New Form of Warfare

The terrorist attacks carried out yesterday in Paris are proof of the ever evolving concept of modern warfare. We have known for almost two decades that the days of soldiers clashing on battle fields are long gone, but in the last fifteen years we have witnessed a constant evolution in what war actually means.  

We began with high profile terrorist attacks, such as 9/11 and have evolved into something else. Terrorist organizations are now growing more sophisticated and are able to use social media and territorial geopolitical shifts to penetrate and coordinate strikes against their targets.

The Paris attack is emblematic of the strategies they are now developing in order to achieve their goals. ISIS has been able in recent months to enter European territory masked as refugees thanks to the massive exodus from Syria caused by ISIS itself. Once they are accepted into an EU nation, they can move freely among EU countries thanks to the Schengen Treaty, which allows free movement of Europeans within the EU. This makes it more difficult for intelligence services to keep track of potential cells that are forming and plotting attacks. As we have learned today, the Greek Interior Minister, Nikos Toskas confirmed that the Syrian passport found on the body of one of the attackers belonged to a man who entered Greece alongside other refugees.

Some European news outlets this morning are questioning the efficiency of the French Secret Service in identifying and curtailing the attacks carried out yesterday in Paris, especially in view of the COP 21 Summit to be held in the French capital in just two weeks. It is not a given however that an intelligence failure is completely to blame in this case.

The DGSI (General Directorate for Internal Security) has spoken openly about having successfully discovered and curtailed “tens of attacks” being plotted on French territory in recent weeks. They have been on high alert due to their role in bombing ISIS locations in the Middle East and were expecting some sort of retaliation effort.

In the case of the Paris attacks, however, the attackers relied on new techniques of infiltration and execution. Rather than deploying lone wolf attackers, they engaged in a modern version of urban guerilla warfare, with a coordinated effort to simultaneously strike multiple venues. The locations chosen by the terrorists were not high profile and were, therefore, not under the watchful eye of the DGSI, allowing the perpetrators to maximize the effects of the attack. A similar strategy was used in the 2008 attacks in Mumbai.

In addition, although details are still being investigated and are yet to be confirmed, it seems more and more likely that the cell was made up of people that came from several EU countries and were, at least, inspired by ISIS. This The movements of people who enter the EU with a refugee status is difficult to trace and represents a serious issue in terms of coordination efforts between the intelligence agencies of different EU states.

It is worth mentioning that while ISIS has always been against the Western powers on an ideological level, its immediate goal was limited to attacking the Assad regime and the Shiite population in Iraq. It did not have, at least initially, any intention of engaging in warfare against the West. If ISIS was involved, yesterday’s attack in Paris was its way of letting Western countries know that they will be retaliated against if they interfere with its goals in the Middle East. Russia also got a taste of this with the downing of a Russian commercial airliner on Egypt’s Sinai peninsula.

One of the possibilities being contemplated is that the cell that carried out the attacks in Paris was made up of a new generation of jihadists, especially in view of the very young age of several of the attackers involved. It is also possible that the members of the cell did not know each other and that their coordination was being managed externally. What is clear here is the growing sophistication with which terrorist syndicates are now able to organize and attack targets without being noticed by even the most vigilant intelligence services. Despite the DGSI being aware and prepared to fend off possible attacks on French soil, the perpetrators were able to organize and execute their strategy without any initial resistance in the heart of a major European capital.

While French intelligence agencies will undoubtedly take some heat for the attacks, it’s probably unfair to place the blame entirely on them. It is, however, becoming strikingly clear that as terrorist organizations become more and more sophisticated, there is an urgent need for intelligence services of EU states (and others) to find a way to coordinate their surveillance systems more closely and efficiently. 

By Marco Di Dionisio

Nov. 14, 2015

Follow me on Twitter @DDCapitalFund