World Financial Markets in Eight Charts, for Week of Sept. 28

This is the next installment of our week series "World Financial Markets in Eight Charts" (you can see our previous installments here). In this series we take a high level view of the global bond, equity, commodity, and currency markets looking for tradable trends or for changes thereof.

We've all seen the recent weakness in the financial markets. It's interesting to note the rapid change in tone in market commentary. Those who are long-term bear market believers are raising their voice again, which seems fair enough. As stated above, this series is one of the exercises we use to determine if a new tradable trend in emerging. So, the question we are asking ourselves at the moment: Is this a tradable downtrend? or just profit taking in the course of a bull market?

We can't predict the future, only interpret what we see in the past, and extrapolate this out into a trading position.

Being primarily trend traders, we take a long term view of the market. We think the graphs below demonstrate that despite the recent weakness, the trend of equities, the USD Index, and corporate bonds remain clear. We always keep in mind that markets rarely move upwards in straight lines; dips and bounces are a regular occurance when viewed over the long term.

We take a little comfort from the knowledge that historically, rises, such as we have witnessed, are usually accompanied by the odd correction here and there. To change our view, we would have to see significant moves to the downside in :

1. high yield currencies (DBV);

2. junk bonds (JNK);

3. small cap equities i.e. a deterioration in the underling breadth of the market (GWX);

4. emerging market sovereign bonds (EMB).

None of which has occurred in a significant fashion. Others may differ on that that. And there is always the potential for the current weakness to turn into a trend changing move.

We've probably said enough. Feel free to review the charts below and see if you reach the same conclusion.

We've had a few comments saying people don't trust charts. Frankly I don't understand that view. The charts above are just a graphical representation of a number series, and the old saying "a picture is worth a thousand words" rings true here. You won't find us drawing on Bollinger Bands, SMAs, ROCs on these; we use our own indicators internally, but we find these are easily misinterpreted by those not understanding how they were constructed. Hence, only very simple trend lines here.

We would consider that markets the size of JNK, TLT, DJW, etc.. are too big to be manipulated by a handful of speculators (unless you are one G. Soros). On that basis, it is reasonable to see, in the rise and fall of prices, a reflection of the broader market sentiment.

This week we will be looking closely at the behaviour of:

• Emerging market bonds (EMB & PCY)
• Junk bonds (JNK & HYG),
• High yield currencies (DBV & CEW)
• Small cap equities (GWX & EWX)

Who can predict the future reliably? We cannot say for certain which way the markets will go in the future; our views are based upon various inter-market behavioural relationships that have been consistent over time.


Disclosure: Long VTI, EEM, DBC , SLV, TBT, JNK, DBV, UDN.

Comments

[tripleblack]

Charts are a handy tool, but as DT rightly points out, the simpler ones chosen with logic and knowledge are the best.

I believe these are part of the homework needed to make good investment choices, but, I repeat, just PART of the homework.

Geopolitics has grown in its role in these studies, imo.

2009 Sep 28 09:10 AM

[Windwood Trader]

The S&P is at historical highs, P/E wise. The institutional managers are not going to be burned again by watching others run for the exits while they wait for the next rise. The US indexes will continue, at best to tread water while the emerging markets try to valiantly put on a good show without the back-up of the core investors.

Keep your eye on earnings and P/E ratios. Should the picture improve the investing public should become more sanguine- At least in the short term. The magic "Baby Boomer" brigade will be absent, however not risking any more to chance as they currently sit with over half their retirement assets in nether-land and trusting nothing they can't see.

Would you put your money in this market?

2009 Sep 28 09:17 AM

[geohjr]

I can't tell you how much I enjoy this. I own almost everything you track, or some varation.

I would encourage you to track BDI, it gives an additional perspective to most these trends.

2009 Sep 28 10:31 AM

[Moon Kil Woong]

Yes I see the dollar dropping and the markets rebalancing. What happens to the market when the dollar doesn't drop? Oh sorry, silly question: Ben Bernake is head of the Fed. The hopes that the dollar won't drop is almost 0%.

2009 Sep 28 08:58 PM