Bull / Bear Tug of War

The equity rally is part of the overall “buy risk” trade that investors have been engaged in for the past few months. A clue to its longevity is to look at other markets to see how they are faring, so that we can understand whether the bull or the bear is in control.

Shanghai rolls over
You have to be a market hermit to not know that the Shanghai market has rolled over. China had been the last hope of strength in a growth-starved world. Moreover, the Baltic Dry Index, as an indication of world trade, is also falling.

[click all images to enlarge]

Commodity uptrend still intact

China had been a huge user and accumulator of commodities in the past few months and therefore fueled the rally in prices. Despite the crack in the Shanghai market, it is interesting that commodity prices, in aggregate, remain in a fragile uptrend.
Carry trade mixed

Another element of the risk trade is the currency carry trade. So how is the carry trade doing?

The chart below shows the New Zealand Dollar/Yen cross, a favorite of the carry-traders. This trade is now testing its uptrend line, but until that line is breached, the bulls should be given the benefit of the doubt.

New Zealand Dollar/Japanese Yen

Here is the Turkish Lira/Japanese Yen cross. Same story as NZDJPY - the uptrend is intact, but barely.

Turkish Lira/Japanese Yen
What about Eastern Europe? Remember how Eastern Europeans had mortgaged their property purchase in a low yielding currency like the Swiss Franc? Here is the Hungarian Forint/Swiss Franc exchange rate. Interestingly, FX traders had been in that trade since early March. It breached its uptrend line mid-August and it appears to be in the process of rolling over.

Hungarian Forint/Swiss Franc
Finally, we visit the Mexican Peso. Mexico was the subject of an S&P warning about its debt, but that weakness appears to have been widely telegraphed in the FX market.

Mexican Peso/Japanese Yen
Are the bulls or bears in control?
I have warned about the risks of this equity rally (see examples here, here and here). Instead of trying to call the turn in the market, some of these aforementioned indicators are a clue of whether the bulls or bears are in control of this market.

Right now, it appears that they are in a tug of war. Many of the indicators are now testing their uptrend lines. If they get breached, then it is a clear sign that the bears have won the upper hand.

Comments

[Michael Clark:]

In all but Chinese markets, the Bulls are still in control but their back right leg is being eaten by the Bears. Can Bulls continue rally on three legs...isn't that a Chinese candlestick formation (The Bull With Three Legs).

Taiwan and Korea are very resiliant, resisting selling impressively. Japan is wounded and beginning to slide back.

Profit-taking in all American and European markets. Profit-taking is an ambiguous word that means it might get worse but I won'r really know until it does get worse.

Sep 03 06:19 AM

[Mad Hedge F...:]

zxcbn.Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO’s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns. I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That’s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; “Markets can remain irrational longer than you can remain liquid.” Better to wait for a more convincing break on the charts before piling on those shorts again.

Sep 03 10:57 AM

[Mike Kane:]

good point Cam...I actually mentioned the same thing to the AP yesterday--- www.google.com/hostedn...

Sep 03 04:15 PM