We have had rumour on top of rumour. Central banks took action to liquify the system through their collateralized swap loans, equity markets were over sold and we recorded one of the best weeks for asset prices in years. Markets have risen nicely to resistances and tomorrow the euro meetings start. The good news is priced into the market, imo. Ask yourself how the solution to the euro problems have actually changed in the last week or so. Should we be encouraged by the public statements? And, in addition, remember words are cheap vs actions. Actions, laws and capital speak far more loudly than mere words. In my opinion the words have been weak, lack detail and show little flexibility. Fiscal Union seems as far away as ever as does ECB monetization, as do euro bonds, as does an increase in the scope and size of the EFSF and as does an increase in IMF SDRs. All the sorts of elements we would expect to see coming to together to form a ‘final solution’ are not coming to together quickly or materially enough. The central bank liquidity injections have assisted and bought a little time but this is not a permanent fix and all eyes are on these euro meetings tomorrow and Friday. If they disappoint again its hard to see the central banks holding the line without significantly expanding their balance sheets and printing like crazy. This feels like a classic case of “buy the rumour sell the news”.
As always here the devil is in the detail. The technicals on most equity indexes do not hint at anything more than a short term sell signal as prices have hit resistances. Eurusd is technically, however, very weak and the dx looking more promising. (The euro continues to fall vs the CAD from the resistance that i flagged a few weeks ago. This has been an excellent trade and continues to run). The CRB looks weak. Copper a good lead instrument on the industrial complex look ok actually.
but its equity miners look horrid. Here the copx etf, a basket of copper miners.
Oil remains strong, having added 33% since October vs gold barely rising over the same period.
We have mixed signals therefore and imo this is part of a gradual correlation breakdown between risk on/off assets. This process has been underway now for some time.
I would suggest some hedging option puts for now on equity markets. I would remain short the euro and long more solid currencies from cads, seks, usds, etc. I am still personally long around 90% but this ultra bullish stance is mitigated a great deal depending on the euros performance vs world fx. I am retaining around 15% leverage to hold high yielding conservative equities to take the yield. My net, as i say is at 90% as i hold a few YMs futures shorts. As well as NQ, YM and ES puts. I hold DX calls. I would like to expand the shorts with some specific stock short targets rather than index shorts. I’ll pick up these specific asset targets and instruments in the forum pages.
I strongly suspect this euro meeting is a ‘buy the rumour and sell the news’ event although technically it continues to be a mixed picture thanks, in great part, to continued central bank meddling. The theory suggests markets should always revert to their prior course once the meddling diminishes. If the euro area doesn’t provide the market with crediable money supply increasing strategies the markets will resume the path they were previously on.. ie down.
All the best guys. Take care..
Rich
(4 votes, average: 5.00 out of 5)
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