The Swiss team haven’t changed their minds. They see yesterday’s new highs as a wave 5 of this trend. They still favour a near term pull back sighting the weakness in the cyclical material, industrial and transport stocks as evidence. We can see this recent rally has not carried miners or industrials with it. Other cyclicals like banks, retailers and home builders have broken out to new highs so, my view would be, its a mixed picture.
I want to point out a couple of items the Swiss team have omitted on this report. They are normally very keen on sighting the AUDUSD as the key risk on and risk off indicator but they seem to be ignoring it on this occassion.
To me, she looks to be relatively weak and hence is showing continued weakness for materials. We can rationalize this easily of course from the weak Asian and European economies. But this industrial weakness need not affect the US economy and we should not forget this point. Here below the AAII sentiment survey, which no longer show over bullishness.
So overall, to be clear, I’m not advocating chasing here either but tactical entries on some stocks with stops in place if things retrace and rollover seems very wise to me as a US drifting higher cannot be ruled out.
Once again we must carefully think through correlations and price. Why have cyclical material stocks not joined the rally? Which regions economies demand materials and which do not? The US economy is all about services not materials, industrials and transports. As the Shanghai and Europe struggle can the US sustain, given its internal demand (albeit stimulus enabled)? In my opinion the US can decouple, to an extent, from this cyclical world. Indeed i can clearly remember reading the following article from the Economist back in 2003.
http://www.economist.com/node/2050678
When you read this article above you realize how little, if anything at all, has changed. But whether we love it or hate it the US has this ability to sustain their consumer demand as they own the world’s reserve currency, the USD. The US does not rely on anyone else’s demand for her products as she sits at the top of the pyramid. Europe is more closely aligned to Asian demand than the US as more of her economy is about industrial production. (Especially in the absence of state or private increases in debt levels). The USD as the reserve currency continues to provide a wonderful advantage, for now. Ben Bernake is doing all he can to destroy the USD but for now she sustains. (By the way, I checked back and i see the UBS team have basically followed a near term bearish stance from the end of Dec 2011. This ties in nicely with the data that demonstrates most professionals and private investors have entirely missed this rally.
All the best
Rich
(8 votes, average: 5.00 out of 5)
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