We need to pay close attention the European bond market and the euro. High levels of debt may rekindle deflationary fears, which could negatively impact the price of stocks (SPY) and commodities (DBC). According to Bloomberg:
Investors must share the cost of sovereign debt restructurings, French Finance Minister Christine Lagarde said yesterday, backing a German call that helped drive yields on so- called peripheral bonds to record highs. China had its debt rating raised one step today to Aa3 by Moody’s Investors Service, which cited the nation’s financial strength and ability to contain losses from a credit boom. “Lagarde’s comments mentioned restructuring, and that’s another nail in the coffin” for peripheral debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “There’s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.” (Full story).
The German economy is well positioned relative to the ratio of their imported goods to exported goods. Germany (EWG) may offer an attractive alternative to the EAFE Index (EFA) (or source of diversification). Germany’s current-account surplus as a percentage of gross domestic product for 2010 is set to be 6.1 percent, the second highest in the G-20, after Saudi Arabia, according to International Monetary Fund projections. The U.S. is likely to see a deficit equivalent to 3.2 percent of GDP, the third deepest, it said. The German ETF has shown impressive relative strength vs. the other components of the EAFE Index since February 2010. The EAFE includes the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
The U.S. markets were set up for the bears on Wednesday at the open; (a) the dollar was up, (b) the VIX was up (indicating fear), (c) the euro was down, (d) commodities were down, and (e) stocks opened in a very negative manner. The bears did not take advantage. The bulls showed the staying power of the current rally. Notice the ratio shown at the bottom of the chart below; it opened with a positive trend despite (a) thru (e) above, which was impressive. The chart below shows Wednesday’s trading session in 5 minute intervals.
Click to enlarge charts
Wednesday’s market had a bullish slant, finishing in the black with decent market internals. Volume was down slightly on both the NYSE and the NASDAQ. Our comments from Tuesday (S.A. post) made reference to weekly charts, so how we close out the week in the dollar (UUP), euro (FXE), and VIX (VXN) may help us understand if a move toward 1,235ish to 1,256ish is probable for the S&P 500. Little new information came to light on Wednesday except that Cisco’s (CSCO) earnings [see transcript] disappointed the street. The bulls remain in control as of Wednesday’s close.
Dennis Gartman gets up at 4 a.m. every day to study the markets and write his daily market letter. Needless to say, Mr. Gartman has seen all types of markets under various circumstances. Gartman was interviewed by the Bullion Vault on November 8th. Below is an excerpt of the Q&A (full article).
Crigger: Dennis Gartman, in your newsletter, you recently wrote that gold was “hyper overbought” and “hyper overextended”. That’s quite a contrarian view right now.
Dennis Gartman: It’s possible that Gold Prices will still go violently higher, but if past is prelude to the future, one has to be skeptical of gold’s ability to launch much higher than where it is right now. Does that mean that this is the end of the great bull market in gold? No, just as the decline last December from $1220 per ounce back to $1100 was not the end of the great bull market, either. But it was enough to shake late buyers and trend-following individuals. The skeptics who finally threw in and bought gold? Last December washed them out and made the market healthy again. My bet is that we get another washout, which will make the market healthy again. And we will go to even higher levels a year from now. But is gold, in the short term, preposterously, egregiously, exaggeratedly, shockingly, surprisingly over-bought? Oh, you bet it is.
We agree gold (GLD) and many commodity-related investments could move higher, maybe sharply higher, but that would only increase the downside risks. Any gains made in gold over the next few days will most likely be fully retraced during the next pullback. Anything is possible, but based on any rational analysis gold and silver are extended.
Like the stock market, the bulls remain in control of the commodity and precious metals markets. Like the stock market, the bears have had several opportunities to make a stand in the precious metals and commodity markets; thus far, the bears have only been able to muster a few pullbacks.
Disclosure: DBC, EWG, GLD
