Is this the beginning of reversal of what we have seen over the last 8 months?
We have been asking ourselves this question for the last couple of weeks and getting rather apprehensive in the process; we may have cool heads but we are still human!
Since early March, it has been a rather one way street for "risk seeking" trades. Experience tells us that once markets move in one direction for long enough too many weak hands enter the market (weak hands are an expression for those who are weak emotionally or have used too much leverage meaning they are unable to hold onto their position through pullbacks). When this happens it does not take much to engineer a pull back of some force.
What would we be looking for to suggest the start of something more than "profit taking" or a "consolidation"?
Quite simply the answer is time! In the markets nothing happens overnight except for random volatility. If this pull back really has got bearish legs then it needs to at least push markets below levels they were trading at 3 months ago, i.e. below 1st of August levels. For the time being at least all of the markets depicted by the charts below (with the exception of US Treasuries and the USD Index) are trading well above their 1st of August levels.
Raised from their recent slumber, the bears are back again.
Those who took bearish poistion in July would still be hurting. As contrarians only when the perma-bears (no names need mentioning) throw in the towel will we be inclined to start looking to make money on the downside or at least begin to close out our longs.
Equities
World equity markets are more or less at their 1st of October levels but commentators have been quick to become bearish behaving as if markets had already gone below their 1st of August levels. This is the same condition that beset markets in July which ultimately limited their downside.
Fixed Income
If the market were really that bearish then we believe that US Treasuries should have already made a multi-week high and junk grade bonds should have made a multi-week low. Usually these markets are leading indicators for risk seeking trades. OK the chart of TLT is enough to drive a trend trader mad but the behaviour of JNK suggests a market still very much in the mood for risk taking.
Commodities
Higher highs and higher lows is what defines a bull market and the CRB and Silver both conform to this pattern. We note that the CRB Spot indices closed at multi-week highs on Friday, which suggests that the underlying commodity market (the real market for here and now delivery) remains ever so strong.
Currencies
Don't be expecting the USD Index to go down in a straight line! There will be the occasional rally on its way down. Major support for the USD Index lies at the 72 level which is still some 6% away from current levels. We believe that the next counter rally in the USD Index will only happen upon reaching the 72 level. DBV (the carry trade) has pulled back but to be honest we just cannot get bearish the carry trade with Aussie and Norway now entering an interest rate raising phase and low yield currencies clearly someway off being in a position to play catch up.
We think that the pull back is merely the market's way of keeping risk takers in check (shaking the weak hands out of the market). Accordingly this should be seen as a healthy development and as a buying opportunity rather than selling for stocks, commodities, corporate bonds and high yield currencies, and a selling opportunity for US Treasuries and the US Dollar.
It can be difficult holding onto long positions when your account value has taken a hit. But hold we shall, and accumulate, accepting the risks.
Disclosure: Long VTI, DBC, TBT, JNK, UDN, DBV, GWX, SLV.
