Watching wet paint dry would be more exciting than watching the behavior of the US stock market as of late. Of course in the market just when things get boring, just when trend traders throw in the towel, the markets rises to the occasion. The question remains - is the next big move to be to the upside or downside? The market continues to whisper that its intention is to break to the upside. This has been my interpretation of what the market has been telling me ever since the end of June at least.
It has been a very long time indeed since I have seen major market indices from different asset classes line up on significant pricing levels. The four big levels that I have been watching are:
- S&P 500 1130
- Value Line 2450
- CRB 280
- Aussie Dollar 0.94
If one market can close above their respective key pricing level then the rest are likely to follow in quick succession. What is rather exciting is that given the length of time that these markets have traded in a relatively tight trading range, the breakout promises to be of a magnitude that will take both bulls and bears by surprise! OK to the markets let me walk you through how what I am "seeing".
Yes we have seen it all before, the S&P 500 has failed on two occasion to break 1130 so here we go again. I am going to load up on puts/sell short. Well, that is my sense of what many commentators/traders/punters are thinking right now. I still find a complete absence of genuine bulls out there. In any event, a close above 1130 signals a bullish breakout which is liable to result in a wave of short covering. I will be surprised to see the SPY not trade at a new high for the year if it closes above 1130.
Why such a bold stance? Well look at the chart below. For how long can the divergence between highly risky emerging market small caps and relatively low risk US large caps continue? Which behavior do we trust emerging mkt small caps or the SPY? Given that emerging market small caps are highly sensitive to global liquidity and growth conditions/expectations, I put my faith in the behavior of emerging market small caps. Yes on the quiet while everyone has been preoccupied with the buzz-words "deflation" and "double-dip" the riskiest of risky assets has been powering higher with passion and determination.
The initial signs of a breakdown in US Treasuries (yields rising) has begun. Given how crowded this trade has become in recent months you might not get a double bottom at all.
There is another market that is very related to emerging market small caps and by default also acts as a leading indicator for equity markets and that is the junk bond market. With multi-week highs, actually a new high for the year, it is not suggesting a contraction in liquidity or that default risk is on the rise, rather quite the contrary.
Now usually I refer the "old CRB" (now known as the CCI) because it gives a far more accurate representation of the behavior of the average commodity. But most pundits are aware of the CRB as the granddaddy of commodity indices (much like the S&P is for the US stock market). So it pays to look at key pricing levels on the CRB if for no other reason than closes above or below tend to become self-fulfilling. Now don't you find it bizarre that the CRB is trading bang on resistance along with the S&P (and Dow)?
I have said this before and I will say it again - how can there be deflation when the price of virtually everything that you can eat in its basic state is going through the roof? In a few months time, how can anyone going into a supermarket not walk out with a whole lot less in their trolley with their monthly food budget? I find it so bizarre that no where in the press of popular opinion has the literal explosion in foodstuff commodities being talked about! Of course it is not limited to just foodstuffs. Just about every commodity known to man is on an upward march. I think "deflation" as bantered about by the popular press and highly paid economists is one of the biggest delusions in modern history!
Yet another king-pin in world financial markets, the Aussie, is knocking on the door of a critical pricing level. The Aussie has gone nowhere in some 11 months against the USD. On four previous occasions it has failed to close above the 94 level. OK, quote me on this.....if the Aussie closes above the 94 level then within two months it will trade at parity. Needless to say I think it will close above 94 perhaps within the coming hours as opposed to days. This breakout will probably help drag the CRB and S&P above their respective resistance levels.
In support of a breakout in the Aussie is the behavior of emerging market currencies. Many high risky emerging market currencies are within a whisker of multi-week highs/lows against the USD (depending on which way they are quoted).
I find it so intriguing how so many markets are lining up on critical resistance levels. As I said before, once one breaks through the rest will follow. Which one will break through first? Well quite frankly who really cares......although I suspect it will be the Aussie dollar.
I try not to have preconceived ideas but it does seem as if cash is being made to be trash.......and that central authorities are sending a loud and blatant message to punters with respect to cash - use it or lose it!