Welcome to 2011. One of my first Diary entries in the New Year, this is a forecast of a few major macro & broad market themes for the year 2011 A.D. The sweet-spot for my trading strategy stands at around one month, so an outlook exceeding that horizon depreciates the further it strays. Thus, I'm here watching everything day-to-day. From where I sit today, here's what I expect. Enjoy...
1. S&P 500: After reaching resistance @ $135, SPY's immediate reaction will hold the key to its 2011 performance. (Click on any chart below to enlarge)
SPY monthly- A tilted Head & Shoulders has developed since 1999. 2011 will certainly reach $135, which will also serve as a formidable resistance for SPY. Failing a breach of that level could send SPY into a long-term spiral down to its lowly neckline around $70. I do expect a failed breach, but the subsequent drop should get trapped in the dual support $110-105 in the Q3'11. I'll have to reassess then.
2. Fixed Income: HYG will outperform LQD through Q1'11, at which point the HYG chart will turn-over. High yield spread widening could start a normalization in historically tight inter- & intra-asset class correlations, particularly as government intervention programs wane.
AGG daily- The Aggregate Bond Index doesn't sugar-coat the recent selloff in Fixed Income. Temporary reprieve will allow bonds to rally off recent lows, but the longer term picture is grim nevertheless. If any bubble remains after 2008-09, it's the bond bubble. We're maintaining our 1-10 year ladders in our Income Strategy only, but we're not adding new strategic bond allocations anywhere else.
LQD daily- Investment grade bonds will follow AGG in a rebound, but long-term, they've succumbed to an erosion of value given our zero interest rate environment. Yields are too low. Period. After corporate refinancing throughout 2009-10, excess supply in the Investment Grade space simply won't get sopped up by the government. MBS & Agency issues will, Munis may, but IG slips through the cracks between government interventions. Compressed yield + no government put option = negative real return.
HYG daily- High Yield confirms that the dip in Investment Grade results not from default risk, but from interest rate risk. HY has held-the-line to maintain its bull rally since March 2009, but the price-action is resisting the underlying technical indicators. Upside momentum is visibly waning, and the trend is culminating. I expect outperformance in HY through Q1'11, but this chart will turn over at some point in the summer 2011, after the Fed suspends asset purchases in June. Do not forget that an onslaught of supply pushed the bond bubble into a blowoff top since 2009. ZIRP, a flight-to-seniority, and demographics drove demand to meet record supply, and High Yield issuance trumped all others. The Baby Boom has made its retirement reallocation into fixed income, Pension funds have absorbed HY to hit their 8% return targets. A drop in trading volume will portend the H2'11 HY downdraft, and for the time being, we're long HYG against a short LQD in a pair trade.
3. US Dollar: I expect longer-term bullish trends can unwind in an ugly 2011 if DXY fails short-term resistance @ 81.50.
DXY weekly- Actually, the monthly chart of the U.S. Dollar Index shows that a secular USD bull began back in March 2008. As for upcoming 2011, the weekly chart is a more appropriate gauge. Therein, the DXY indicates that the USD is still in bull territory and not worth betting against yet. The divergence between technical indicators and the double top @ 88 means that the upside is fleeting at best.
DXY daily- the shorter term daily chart shows pending resistance just under $81.50. A failure at that double top would confirm the developing bearish trend in the daily trend, and doom the weekly chart to produce an ugly 2011. Such a failed double-top would lead me to short the USD.
4. Silver & Gold: While achieving its rally over a decade as opposed to silver's phenomenal few months, gold has turned short-term bearish. I'm leaving these alone, as they're in technical no-man's-land, especially silver. I do, however note that gold has already turned short-term bearish.
GC (2003-present): I have to compare this steady, decade-long climb in gold to the recent spike in silver. The two are not equal.
SI (2003-present): As opposed to gold's steady climb, silver has achieved these heights within a matter of months. That spike is a speculative phenomenon that I can't contend with technically, and therefore I won't participate.
EEM weekly- an increasing divergence in the price action is harboring a sharp correction. As MACD broke its bullish trendline recently, I expect this correction sometime in the Q1'11.
EEM daily: The short-term chart shows an underlying slippage in Emerging Market Equities. While Emerging Market Bonds have already slipped & fallen, I'm closing my relative strength paired long EEM/short EMB, due to this technical reading.
Disclosure: I am long HYG.