I’ve been pounding the table about what I think is coming down the pike for months now. Rather than producing another editorial heavy essay, I thought today we’d let the market dictate what’s going on.
First off, we need to examine the currency markets. With over $3 trillion traded daily, this market is the largest most liquid market in the world. As such it’s the fastest moving market, the proverbial “smartest” money that often signals what will soon hit bonds and then stocks.
So what do the currency markets tell us?
The above chart shows the Dollar’s performance of the last year. A lot of commentators like to talk about how the Dollar is doomed and worthless, but they are misguided and wrong. All currencies are paper currencies (doomed and worthless). And the Dollar, no matter how much you hate it, remains the reserve currency right this minute. As such, today it’s the most important asset class on the planet.
With that in mind, it’s important to note that the Dollar is flashing a “flight to safety” or risk aversion. We’ve seen a clean break above the 50-day moving average and key resistance (78) in the last month and a half. The Greenback now appears to be taking a breather just below its 200-DMA. Any move above the 200-DMA would signal a major change in market climate with risk-aversion dominating the world’s markets.
On that note, I wanted to point out that despite stocks and gold roaring higher over the weekend (I’ve detailed this weekly ramp job before), the Dollar only dipped a little. This is quite different from the usual weekend into Monday mania in which stocks erupt higher and the Dollar tanks. In light of this, we need to take the Dollar’s refusal to plunge over the weekend as a significant change, one that likely forecasts continued risk aversion in the markets.
Again, the currency markets are flashing that “risk aversion” has returned.
Now let’s move on to bonds. At $72 trillion in size, the bond market is roughly twice as big as the stock market. As such it can be considered the “smarter” money (smarter than stocks, not quite as smart as currencies).
The above chart shows the iShares T-Bond 20+year ETF (TLT); a basic proxy for the long-end of the US Treasury market (bonds with maturities greater than 20 years). As you can see, the “risk aversion” trade began in mid-December here too with bonds rallying (yields falling as a result of this) into January.
Interestingly, the strength of this rally is not nearly that of the Dollar, failing to break above the 50-DMA. This isn’t surprising totally given that most investors want shorter term US Treasuries right now (the long end of the market has been suffering for months). However, despite this, “risk aversion” remains the name of the game.
This is even more obvious for 10-year Treasuries.
Look at the spike that started in late December. Also notice that the 10-year broken overhead resistance at 117 with no difficulty at all. It’s now butting up against the 200-DMA and 50-DMA. Any break over these levels and the “risk aversion” trade should really catch fire.
Thus, we see the two largest, most liquid markets in the world flashing danger signals as early as mid-December. As usual, stocks were the last to “get it.”
As you can see, the S&P 500 continued its rally into mid-January (a full month after the currency markets and bond markets began discounting trouble ahead). Stocks then made a gut-wrenching plunge, breaking below their 50-DMA like a machete through a sheet of paper. The technical damage here is severe and we need to see a major reversal (stocks rallying hard back above the 50-DMA) for this not to signal that real fireworks are coming.
Given that both the Dollar and Treasuries remain in uptrends, I expect we’ll soon see stocks breaking down to test the 200-DMA at 1,000. We won’t get there all at once mind you, given the rampant bullishness (2007 levels) the market won’t go down without a bounce or two. But overall, the market right now is flashing that “risk aversion” is the name of the game. This is bullish for the Dollar and bearish for stocks.
This is precisely how I’ve set up the “Correction Now” portfolio of my Private Wealth Advisory.
All told we have three different portfolios set up to cover all the investment bases of 2010. Our “Correction Now” portfolio is positioned to produce gains from any weakness in stocks/ strength in the Dollar today. Last week, while the whole market collapsed, all of the positions in this portfolio rose, some of them producing double-digit gains.
In contrast, our "Kicking the Can" portfolio is set up to produce outsized gains from any continued money spending/ corporate favoritism shown by the World's Government (these are the companies that continually receive unfair deals and kick-backs).
And finally, our "Coming Crisis" portfolio consists of short-term trades that we're waiting to buy when the next Crisis hits. It could be next week, next month, heck even next year... but whenever it hits we've got several investments that could all produce double- if not triple-digit gains in a matter of weeks.