Five Charts to Rule Them All: The Coffee House Guide to U.S. Macro Trends

 |  Includes: DBC, IYR, JNK, LQD, TBT, UDN, VTI
by: Thomas MacLeod

This is the latest in our weekly Five Charts to Rule them All series. Here we look at 5 charts that are representative of the financial markets. The idea is to step out of the day to day trading activities and take a look at the markets from a consistent high level perspective once a week.

We take a walk down to one of the excellent local cafes, order up our lattes, cappuccinos, and biscotti, look up the charts on our iPhones and discuss. We will look at complementary indexes, individual stocks, etc.. these charts are just the starting point. This is a tradition begun at Monmouth's in Covent Garden, London, and continues to this day (minus the iPhones at the start of course). There is something about the smell of roasting coffee beans, and the sight of rake-thin, earnest, left-wing academic types that stimulates discussion about free markets

And so on to the short discussion.

We think that the trends that began late last year are still in place. Reviewing the extended rallies seen in some asset classes, we have a feeling that retracements might be in order.

Markets rarely rise in a straight line & the odd retracement here and there is a normal trading pattern. At the moment our belief is that a short rally in the USD (perhaps around 2%) may occur, we think this will be short as is no corresponding weakness in emerging market currencies or bonds. Using history as our guide, tradable strength in the USD is usually preceded by weakness in relatively illiquid emerging market assets.

Firstly we look at equity markets using the Value Line. Such an impressive rise usually brings in calls of "overbought" - maybe, but we guess that it is going to stay overbought for some time.

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Next on to the Bond markets. The pattern of the Value Line is repeated here, with the rise beginning one month earlier. Seeing high yield bonds continuing to outperform investment grade bonds is one of the main reasons behind our bullish outlook.

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Next onto the Commodity markets. These continue their sideways momentum, neither breaking down, nor breaking out. Our current view is that the next break will be to the upside.

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Next onto the currency markets, in particular the USD. Is any one actually bullish US dollar? As mentioned above we do expect the odd retracement here and there on this downwards spiral. Due to the importance of the US dollar to international trade, the speed of this decline is bound to have implicaitons for the global economy.

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Next onto Real Estate - we have chosen Real Estate as this sector was one of the main causes of the recent economic downturn. We are pretty sure that its recent performance has taken many by surpise (we stand amongst the suprised). It may be well worth your time reviewing some of the specialised Real Estate and Construction indexes and companies and see how broad the momentum is.

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Some will find value in the above, others will consider it more worthless than that bit of tripe and cheese I found inside my grandfathers discarded, long forgotten meat safe.

Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so. - Douglas Adams.

So, to finish off, a couple of things you could take-away from this. Firstly, get yourself an iPhone if you have not already done so. You will never be bored again. Secondly, learn from others. By others we don't mean us (that would be just a tad pretentious), but the markets. Try our exercise of looking at the action of buyers and sellers across multiple markets and see if you come to the same conclusion as us. Strangely, the best place we have found for this is the best coffee house within walking distance (did I mention that we have iPhones?).

Our conclusion, at the moment is that we would not be surprised by some retracement, we are not expecting this to be material (or a tradeable trend reversal). So any downside we would take as an accumulation opportunity.

Disclosure: Long VTI, DBC, JNK, LQD, UDN, TBT, IYR.