We have for several weeks discussed, on the forum pages as well as editor comments, that the technical report produced by our Swiss colleagues had got their near term calls wrong. That, instead, the US equity markets displayed more technical strength than they had accounted for but this didn’t sit neatly with their cyclical model. As the rally sustains, it has inevitably and rightly lead to the Swiss team to amend their cyclical road map. Far from showing weakness in my view it shows strength. What ever model and indicators you use we are merely probabilities here. If the high probability move fails it is likely that a fast move comes from the failure in the opposite direction of the once probable move. This is exactly what is occurring and the team are correct to question their road map on this basis of what price is telling them.
Having asked questions they don’t offer us a clear road map but illustrate several alternative paths. Their own probable path is left more open at present. This is good in my own view. Lets not be too prescriptive here. Lets see how this unfolds with cyclicals and defensive stocks, bonds and commodities. We are in unprecedented monetary territory. Is it any surprise that asset markets are not displaying clear historical precedents here.
Macro wise we continue to see the themes unfolding as we have seen for several years. Namely, monetary growth in a negative real interest rate environment therefore supporting the search for a store of value theme across all defensive type stocks. The real economy outside of these asset price rises continues to struggle so cyclical themes struggle although nominal price rises for their products and margin growth sustains as high yield bonds see perpetual yield compression. Therefore commodities continues to struggle as real demand declines.
To add to the Swiss teams comments. The key pillars of the US housing index and finance index sectors continue their breakouts. Today the US high yield made yet another new high confirming the S&P, Dow, etc, breakouts as commodities continue to struggle with the key commodity currency the AUD breaking through her supports vs the US$ surely a crucial materials signal of weak real demand.
The bullion weakness has continued just as the physical bullion issues persist and physical premiums widen further. On price weakness i am personally laddering a large option call position for my book into the asset class with time expiry stepping along the timeline of the next 18 months or so. This strategy accepts that short term the asset class is difficult to call but that short term moves aside the fundamentals remain firmly in place therefore on any technical signs of low historic volatility and or large swings downward in price I will continue to accumulate option call positions.
Without more delay here this week’s fascinating report:
Also attached here below is the latest WF fundamental economic report illustrating weak real demand in the economy. Of course weak demand doesn’t matter in terms of asset price rises just so long as central banks continue to expand money supply. Currencies are simply being debased not demand increased hence real demand continues to flat line (real inflation adjusted) whilst asset prices soar upward. We can see these issues unfolding clearly before us in the various asset market prices.
All the best
Rich
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