Ok, so where are we? In my opinion, the old trader’s line of ‘buy the rumour sell the news’ has been spot on. Seasonals have a part but they don’t drive the market. We are, therefore, in the process of the entire ‘risk on’ trend breaking.
As a general technical and fundamental comment, rather than near term timing comment, I haven’t more bearish than since 2008.
Technically many asset classes, oil aside, trends are breaking down. Its a gradual process this rather than an avalanche, thus far. Over the last week or so ive been hedged as i explained in various posts.
My long portfolio is a still net 80% with around 25% hedging.. ie im still borrowing, euros and jpy. The portfolio is mainly USD with some usd cash. The shorts are a mix of options and futures. The futures are march dated. The option puts are jan to feb. I cleared some pm positions (inc all the 2012 options in the last week). I like the cad and continue to hold vs the euro in spite of risk off. The cad cash im getting a yield mainly from the reits. (The reits so far have been very defensive and actually added weight in the last few days in spite of the sell moves). Yesterday i started selling a few usds and adding euros. I suspect a bounce in the euro.. everyone is short the euro this 80% of the time does not produce a large move. The herd will take profit very soon.. Possibly right here (although a spike down to catch some stops or trend break sell orders may occur). Thus far the account has not been adversely affected by the weakness and gradual breakdown. This has been due to the bets against the euro which has hedged things especially given equities out performance on the correlation of on risk off risk re the dx and eurusd.
Here the eurusd
We can see the trend line support.. Given participants are very short the euro, that we are a support and that we are over sold on near term indicators the probability is for a bounce and a bounce that may surprise all logic to the upside. Now i dont suggest loading the boat here with euros at all. But i wouldnt chase the euro here either and certainly would not be adding shorts here.
Does this mean asset markets will rise due to the off on risk inverse correlation with the dollar index? We may get a little support but i dont think reistances will be broken at all even with Santa around. The reason for this is the existing over performance of equities vs the dx correlation.Here:
The blue line is the sp500 rebased to dx units.. The bars are the dx (dollar index). We can see what is occuring. On the 3rd of oct the dx rebounded and made a new interim high just as the sp500 bottomed. The oct rebound was hard and fast as the dx sold off and based at 75 or so. The dx climbed back to close to her prior high but failed to surpass the mark. The sp500 sold off but in turn made a higher high. The ‘risk on’ rally held firm. But look now what is occuring.. The sp500 is very close to her prior high when the dx based. I said two days ago that the inverse correlation was at extremes and i took this as a signal to go short the indexes and oil. I was looking at this chart when i made this statement. Since then the es has sold off a little and the dx has added further weight due to the usd adding weight vs all the basket of currencies not just the euro.
The nas100 has cracked and produced a chart price pattern sell signal yesterday afternoon.
Remember i mentioned BIDU as a short target.. She is breaking down.. if the euro does get some support here she may bounce off the bottom trend line support.. its worth watching this as a good entry may show. She is suggesting a large move.
CRB looks oh so dangerous here.. but i wouldnt chase either yet. I would wait for that euro bounce and then we see about shorting her heavily, imo.
The HUI and GOLD are a disaster area.. the reaction down could be hard and fast.. the gold miners could be hit very hard and the juniors off the field. These are technical comments only.. of course the whole thing would reverse on a dime when the money printers come out of their caves.
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Here the HUI and HUI juniors..
In short i havent been so bearish since 2008. These are technical comments but they fit with the fundamentals.. in my view. Euro land doesnt get it. They have tinkered and tinkered. This is a balance sheet problem of too little capital in the banking and private sector driven by ultra low rates misallocating capital to government spending and housing booms. You cannot solve a capital problem by more government spending and increasing banks lending. The ECB needs to create new capital or rather steal middle class capital and reallocate this to its wounded banking system. They cant politically do this so the whole of europe will roll over. The US position is better as the Fed is happy to print and print. But the Fed has expanded her balance sheet for 4 months or so now. We need more juice. The Chinese has been raising rates and the Japanese have printed but its a drop in the ocean compared to the debt mountain demanding interest. The big picture, the world economy is appex. She will crash downward on a deleveraging tidal wave if the printing presses are turned on very very quickly. The IMF and the SDR issue is for FEB. Can we survive that long.. i doubt it.. its possible but the odds now are against. We technically have a small breathing space of the euro bounce along with xmas. Its possible we dont crash pre xmas but its a 50/50 now. Janurary could be a disaster in spite of the seasonal strength that Jan usually brings.
For all said and done the dow continues to look very strong.. The largest corporates in the world with their cash mountains, high dividends and multi currency income streams look the safest asset vs cash, bonds, gold, metals, agri, property. Its no surprise that the dow looks so strong here to me. I am not shorting the dow. The nasdaq and even sp500 are a different matter. Domestic small caps short on cash and big on dreams are to be hammered here imo.
And its here that i would also finally remind re those gold to equities ratios etc.. Gold may decline nominally here a long way but relative to mid caps and small caps she will rise in relative value. Vs the Dow at this point im not so sure as the dow components have cash and cash in the near term may become king again, albeit for a just a few months. I may have lost some gold and silver futures lots but i retain my physical and many of the miners. A core within core must be held as our financial system is insolvent and in the hands of mad men. What follows will be messy and unpredictable.
Lastly, for now, i leave you with a thought. Japan is in a mess. This is the first sell off in recent years which has not lead to JPY strength.. why? What is occuring? The circus is coming to Japan having been encamped in europe for the last 2 years. Japan has deep problems. Here the USDJPY. This story is just at her start..
As a last comment please dont forget the euro vs the swedish Krone. The euro has added weight in the last week or so.. And yet Swedish rates are falling like a stone and the spead to bunds is negative. The Swedish Krone looks very cheap relatively imo. I will be adding Krones if/when we get a euro bounce. Here the problematic 10 yr rate spreads to bunds.
http://markets.ft.com/RESEARCH/Markets/Government-Bond-Spreads
The very very best to all.. There are always opportunities to create capital from every situation.
Rich
p.s and finally a few words of wisdom from Kipling.
“If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too
Yours is the Earth and everything that’s in it”
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