Another excellent report, in my view, from the guys at SC.
Breakouts for the DOW, SP500 & Nas100 is positive US equities. Many emerging market indexes have also bounced up a long way and the Shanghai significantly stepping back from a continuation of breakdown through her support levels producing a possible failed breakdown which always produces a strong bounce. But keep watching that story as the Shanghai isn’t out of the woods yet.
http://www.stocktiming.com/Shanghai_Daily_Stock_Market_Updates/shanghai-index-update-thursday.htm
Many European index themes are also in breakout of recent ranges and have moved a long including strong systemic theme of the euro finance index – SXP7.
The DAX is close to breakout but is trailing her US cousins due to the over weight manufacturing and chemical themes of the DAX components. A bit of bearish divergence can been seen on the momentum indicators vs price across many instruments inc the two above. This is coming at a high over bought level so caution the watch word at the extreme near term.
SC remain over weight equities although seeing conditions as over bought at present. Forecast momentum still carrying the S&P500 to 1490. A near term pull back is becoming increasingly likely but is a buy the dip opportunity. China and Europe remain clouds over the market so they remain unconvinced on the cyclical sectors from a medium term perspective. (See Shanghai chart above). There allocations remain pretty defensive with telco and utility the major themes but with oil and precious metal allocations to gain exposure to the beta. Overall, they are over allocated to equities on the basis of relative yield advantage to bonds etc. They aren’t playing the material industrial themes yet due to wanting more evidence of demand turn around from China etc. The copper chart is technically less convincing that precious metals this is correct. The US$ is oversold and due a bounce in their view. From a medium term perspective they forecast a gradual weakening of the US$ but view the trade as more complicated as less of a ‘one way street’ than before. I agree with this. The US may out grow her rival economic zones in real terms soon and this will affect the fx pairs greatly. In addition ongoing geopolitics may provide a risk off support back drop to the US and lead to more allocations to the US$ even with the monetary action by the FED. We can also see this time around the FED wont be alone in monetary and fiscal easing given the deep issues in China and Europe.
I must say overall this fits very well with my own view and allocations, although, to be clear, i no longer hold any fixed income high yield bonds. (Note their comments above re US$ and their chart of the high yield bond yield compression, these two factors, coupled with monetary action we see, keep me out of the high yield bonds, for now).
I did step up industrial allocations prior to the recent moves a little which SC chose to not get involved in. To explore this issue of the “industrials”. Cyclical material and commodity stocks were mostly deeply over sold and pricing in a repeat of the 2008 collapse (autos and chemicals aside).
Monetary events have moved significantly in the last few weeks so the bounce had to come through. The material stocks along with the Shanghai had broken or were about to break key price supports so a price abyss seemed ready for Chinese and material themes alike. Monetary moves intercepted the collapse perfectly. ‘From failed moves come fast moves” and so it is that material cyclical themes have bounced back a long way. Some of the 40bn a month and the ESM rescue funds will make their way China and EM economies in general but my view would be its not quite enough yet to really sustain these cyclical stocks to press on. SC seem to be concurring with this view otherwise they would step up their material allocations.
I’m maintaining an under weight to materials allocation on this basis.. Ie the industrial metals, manufacturing stocks, etc. Like the SC team i’m playing the monetary debasement theme, for the moment, via precious metals and oil and a bounce in the industrials albeit underweight. Tactical trades rather than a strategic allocation. I have an open mind on the industrials but i’d like to see significant Chinese stimulus before moving to an equal and even over weight allocation to this sector. The US$ is oversold for the moment. The problems of de-leveraging have not changed in euro land. A strong euro is the last thing they need as exports will be squeezed.
Geopolitical events are heating up. Markets have not priced this in as yet. Gold, the US$ and oil are all positive correlated to bad geopolitical events. Equities would fall particularly manufacturing stocks but the negative effect might not be too damaging on a war in the middle east etc. It clearly remains a concern though.
On the economic front demand destruction is still underway in the Euro zone with no balance sheet expansion as yet. Neither consumer nor commercial loans are seeing any growth. Indeed they are still contracting across the euro zone. (German consumer aside). Nothing seems to have changed on these issues. The ESM and ECB can only act on certain conditions. One being the country formally requesting help. Neither Spain nor Italy have done this yet. We have no new money supply until this occurs. There is no self sustaining recovery in the euro zone so expect plenty of negative news flow until euro starts to peruse an expansionary monetary policy again. Expect GDP to lag in the Euro zone. Defensive themes only therefore in Euro land.
Lastly in terms of economic history. We have mad men at the helms of the world’s central banks. Printing money has become the solution to the system’s and individual economy’s structural ills. Throughout history these sorts of policies have always lead to inflationary pressures to build. One day soon we will see significant inflation across the world. When this occurs it will be interesting to see what happens to all those government and consumer debts? How do you stop inflation if you don’t raise interest rates? And if you raise interest rates how will the consumer and governments pay the interest due? These are serious structural issues that will play out in the coming years. The first wave of inflation is always the most pleasant so lets enjoy this coming wave as the next ones will become increasingly unpleasant.
All to play for in the run up to year end just a few months away now.
Here the report:
Rich
(5 votes, average: 5.00 out of 5)
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