The week ahead could be another crucial test for Wall Street and financial markets around the world. Investors will be looking for clues to find out whether the ongoing decline in stock and commodity prices is part of a normal correction in a bull market or a turning point from a bull to a bear market.
Major Equity Indexes Last Week
One-week Performance (%)
SPDR S&P 500 Trust (SPY)
Powershares QQQ Trust (QQQ)
SPDR Dow Jones Industrial Average (DIA)
Major Precious Metals ETFs Last Week
One-week Performance (%)
SPDR Gold Shares (GLD)
iShares Silver Trust (SLV)
Freeport-McMoRan Copper and Gold (FCX)
The first clue will come on Monday morning from Japan, from the value of the yen vis-à-vis the U.S. and European currencies. A further strengthening of the yen will be negative for Wall Street and the European markets, while a weakening will be positive.
The reason is quite simple: Japan has become the new reservoir of liquidity, ready to flow in every debt market where yields are higher than the near zero Japanese Treasuries; and every equity market that holds promise of a faster appreciation than the ailing Japanese equity market.
In fact, Abenomics - Japan's unprecedented Quantitative Easing (QE), has turned into a Deus ex machine for both the European and the U.S. markets. For European markets, Abenomics has substituted the ECB, the EU, and the IMF as a source of liquidity. This has served to depress yields of heavily indebted countries - yields for Greek debt have been dropping so fast that the country is planning to return to the bond market by 2014.
For the U.S., Abenomics provide a cushion for the Federal Reserve, as it prepares to unwind the several rounds of Quantitative Easing.
The second clue will come on Wednesday, from Fed Chairman Ben Bernanke. Any indication that the Fed will taper off the buying of U.S. Treasuries could give another push to long-term rates fueling another round of selling in precious metals and high dividend paying stocks - though such a scenario is very unlikely given the lackluster predictions for world economic growth by IMF and the World Bank. Tame U.S. inflation numbers reported last week could further help Chairman Bernanke to find calming words for Wall Street.
The third clue will come from earnings reports from bellwether companies, Adobe Systems (ADBE) on Tuesday, Federal Express (FDX) on Wednesday and Oracle (ORCL) on Thursday. Again, any major negative surprise here would raise doubts as to whether the equities rally can continue on liquidity alone.
The bottom line: Keep an eye on currency markets, the Federal Reserve, and earnings from bellwether companies--they will provide clues as to whether the recent declines in stocks and precious metals is part of a normal correction or something more serious.