Seeking Alpha

Cliff Wachtel's  Instablog

Cliff Wachtel
Send Message
Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
My company:
THE SENSIBLE GUIDE TO FOREX
My blog:
THE SENSIBLE GUIDE TO FOREX
My book:
The Sensible Guide To Forex: Safer, Smarter Ways To Survive & Prosper From The Start
View Cliff Wachtel's Instablogs on:
  • 10 MUST WATCH EVENTS THIS WEEK, 4 IDEAS TO CONSIDER

    Coming Week Market Movers

    The following is our weekly preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week's market movers and trade ramifications.

    1. GREECE: The Third Annual Greek Spring Breakdown -Another Big Game of Chicken

    A Greek default and EZ exit remains the biggest near term threat. As we predicted in last week's post, reaction to the election results had potential to dominate market sentiment IF the election raised the threat of Greece reneging on its bailout commitments and defaulting. It did, producing the worst case scenario result: either a coalition or another election that ultimately sets Greece on course to renege and/or default.

    Greece remains the nearest knife at the EZ's throat, and so we expect news related to the chances of a sudden exit and default to again dominate sentiment across risk asset markets.

    The argument that a Greek default was mostly priced in died this week, as most major stock indexes and the EUR got bitch whipped mostly from Greek election results. It isn't Greek default per se that scares people, the EU can afford that one (as for Greece itself, few care). It's the fear contagion: that financial and credit markets freak, flee the EU, the other GIIPS are forced into default and/or the EUR gets printed into oblivion or disappears, etc.

    Given that no one expects any quick resolution, Greece is likely to hit the markets in one of 3 ways:

    • The best case scenario for the coming week is that there are no major negative surprises from Greece
    • The worst case would be that there are, and they push up the odds of the feared sudden exit and related contagion as other GIIPS and even the core EU nations get slammed in financial and credit markets.
    • The middle and likely case: leaders on both sides continue to buy time, make threats but leave options open, and Greece continues to exert downward pressure on markets.

    Specifically, the consensus is that there will be new elections that put the left wing anti-austerity/bailout agreement Syriza party in charge, putting Greece on a collision course with the EU, which obviously cannot allow the precedent of reneging on bailout agreements. ECB Executive Board member Joerg Asmussen has rejected any change to Greece's reform program if Greece is to remain in the EZ. Greek's banking system is utterly dependent on the ECB, and as Italy's former PM Berlusconi learned, it plays hardball when needed.

    What's clear thus far is that Greece doesn't want to leave the EZ, but that the political will for continuing with the bailout program seems exhausted, yet the ECB insists they continue. Hmmm. Of course, this is all part of the normal negotiation in the annual spring break (down) in the Greek drama.

    The fate of Greece is a political matter decision and thus particularly unpredictable in the short term given the number of players. We don't know what politicians on the Greek or EU/creditor side will say or when they'll say it; however here are specific events to watch this week.

    • Final attempt at coalition and avoid another election: By early this week we'll know if final attempts over the weekend to form a coalition were successful. If not, then another election is coming. It's expected to bring in a more radically anti bailout regime
    • Greek bond redemption: While Greece has enough cash to avoid further defaults until June, there's a ~€450 million bond redemption due next week. With a hung Parliament and possible default looming anyway, it's likely that Greece will use its 2 week grace period to delay payment until the end of May. This would both save cash and maintain uncertainty and pressure on the markets and EU to offer Greece a better deal. The delay is good for Greece, bad for global markets as it feeds fears of Greek default.
    • EU Spin Control: Given the likely bearish effects of the above, expect some spin control from other EU officials. If markets are desperate enough for some positive news (and at technical support levels anyway) that might inspire some stabilization or even a bounce for risk assets).

    Longer term, Greece's fate is clearer. Unless the EU, particularly Germany, decides to spend a lot more in debt forgiveness and other growth inducing aid, Greece will default, exit the EZ because it can't afford to do otherwise, and suffer even greater contraction in the coming years, at least before the benefits of reduced debt payments and a devalued currency begin to spur growth similar to that experienced in other post default situations (like that of Iceland).

    WILL MAD THREAT CONTINUE TO WORK?

    The big question is, how long is the longer term? Leaders in both Greece and the EU clearly want to keep Greece in the EU. Like the US and Russia during the Cold War, the threat of Mutually Assured Destruction kept both sides minimally cooperating.

    Expect all parties concerned to try to buy more time while they figure out how to reconcile Greece's inability to live up to its agreement with the EU's inability to set a precedent of a GIIPS nation reneging on its commitments to repay and still getting aid.

    2-3. OTHER EU: SPAIN, FRANCE, & GERMANY, OH MY!

    While Greece remains the nearest term threat, Spain and Italy are the bigger ones given that their debt loads are too big for them to be bailout out under current conditions.

    SPAIN

    For now Spain is the more pressing concern as its bond yields (cost of borrowing) rise, and are likely to rise further as it proceeds with bank reforms. These are necessary, but are likely to result in more bank debt becoming sovereign debt. The danger is that Spain faces an Irish scenario, given that bad bank loans represent such a large part of Spanish GDP

    Specific events to watch include:

    • Monday: Italy is selling 10 year notes, which are the benchmark for determining current market sentiment about Italy's creditworthiness. Expect the ECB to insure demand is acceptable. That means a good auction (expected) may not boost confidence much, but a bad one should be very bearish.
    • Tuesday: EU Finance Ministers meetings: Might produce some comments of note.
    • Thursday: Spain sells 10 year bonds. As with Italy, the sale is the latest check on its creditworthiness and could move markets if it exceeds or misses expectations.
    FRANCO-GERMAN RECONCILIATION?

    Theoretically the May 15 meeting between newly elected French President Francois Hollande and Germany's PM Merkel should be a huge potential trouble spot. Hollande campaigned and won on a promise to renegotiate the EU fiscal pact and weaken its austerity measures. Merkel is opposed. Hollande has already begun moving closer towards Merkel's position and the consensus is that their meeting will produce a growth pact as a compromise to offset some of the pain of the fiscal pact, and the Franco-German EU leadership team will continue forward, ultimately with some grudging additional German compromises. See here for further details

    The thing that might complicate the above scenario is if Merkel's party suffers badly in regional elections this week and she feels pressure to stand firm to protect the EUR's value.

    On Wednesday Germany is due for a 10 year bond auction, which could hurt sentiment if it's unexpectedly weak.

    4 - 5. US: TWO BIG NAME STOCKS AND THE FED

    Last week JP Morgan Chase, the largest US bank in terms of assets, reported billions lost on bad trades and undermined confidence in the critical US financial sector. News concerning the loss, which apparently came from negligent risk management, and market reaction could continue to move markets this week. Also, Facebook's IPO is expected to be the largest for any internet stock ever, and so might prove market moving if it exceeds or misses expectations

    The FOMC's April Meeting minutes will provide the latest look at Fed thinking and influence expectations about the likelihood for additional US stimulus (a key market moving consideration over the past year).

    6-9. Other Key Calendar Events

    Here are the other important calendar events to watch this week that we didn't mention above.

    Tuesday: German ZEW survey and US CPI, retail data, as well as Empire State Mfg index and TIC Long Term Purchases

    Wednesday: UK - BoE Gov King Speaks and inflation report, EU - ECB Pres. Draghi speaks, US - Building Permits, Housing Starts, Industrial Production

    Thursday: US - weekly first time jobless claims, Philly Fed Mfg index

    Friday/Saturday: G-8 Meetings

    Consult any good economic calendar like that of forexfactory.com for additional events and details

    10. TECHNICAL PICTURE

    Our preferred risk asset barometers, the S&P 500 weekly chart look primed to test lower support levels.

    For example, the weekly S&P 500 chart shows a bearish head & shoulders pattern that suggests a test from its 1350 level at the end of last week to ~1300, where its 50 week EMA also resides, so 1300 is the next test. A break below that suggests the next real support is around 1230-1200.

    So breaches of the 1300 level suggest similar further declines for other risk assets.

    ScreenHunter 01 May 13 03 00 10 MUST WATCH EVENTS THIS WEEK, 4 IDEAS TO CONSIDER

    S&P 500 WEEKLY CHART

    Source: MetaQuotes Software Corp, globalmarkets.anyoption.com

    01 may 13 0300

    4 LESSONS AND RAMIFICATIONS

    So practically speaking, what do you do?

    1. STOCKS: EU CRISIS PERIODS BAD FOR RISK ASSETS IN GENERAL

    Given the still elevated level of most indexes relative to recent years, they remain vulnerable to bad news. By region, most European stocks remain riskiest, followed by Asia and then the US as the least of a bad bunch. We're not keen on new long positions in any of them, unless you're a very long term investor and getting a very stable dividend, so that you treat these as long term bonds, bought with cash you won't need.

    After an over 2 year break, we hope to renew our series of articles on the best currency diversified income investments from our coming site, thesensibleguidetoforex.com (companion site to our coming book on safer, simpler ways to avoid being over exposed to the USD or any other one currency, The Sensible Guide to Forex: Safer, Smarter Ways to Prosper from the Start(Wiley & Sons, 2012). Stay tuned for details.

    2. FOREX: A BAD TIME TO BE OVERWEIGHT MOST RISK CURRENCIES
    • USD, JPY The Least Ugly: Yes, the USD will continue to benefit while the EU continues to deteriorate and drag down the EUR, assets denominated in it, as well as currencies (and assets denominated in them) most closely connected to the EUR. Anything related to the CHF will be dragged down as long as the SNB continues to buy Euros and sell Swiss Francs in order to keep Swiss exports cheap. History has not been kind to central banks attempting long term currency manipulation.
    • The AUD (and to a lesser extent NZD) move with the fate of China, which has not yet bottomed, though is still growing, so their fundamental picture isn't as dire as that of the EUR and CHF (which would be great if the SNB would let the market determine its value).
    • That leaves the CAD, USD and JPY, though the BoJ might intervene periodically. The USD remains the least ugly for now. While the CAD is a risk currency it's more tied to the US than the other risk currencies, and the US is currently disappointing expectations less often than China, though China of course is still growing faster. The CAD is also the major currency most likely to see rate increases in the coming year, and least likely to be subject to dilutive new stimulus measures, given recent data.
    3. GOLD: SHORT TERM UNCERTAIN, LONGER TERM BULLISH

    Given the above fundamentals and those we've discussed in prior posts (slowdowns or stagnation in most major economies and chances of severe shocks from the EU), dilutive stimulus programs from the ECB, BoJ, Fed, and SNB should favor gold's recovery. Meanwhile, with EU fear peaking again, liquidity is a priority and so gold is breaking down. We await its stabilization and new signs of stimulus programs before resuming new long positions.

    4. A KEY LESSON FROM THE PAST WEEK

    Regardless of what happens to Greece, the ECB is likely to be forced into further stimulus. Indeed, the combination of poor economic performance and recent election results in the EU has even senior German economic officials like Finance Minister Wolfgang Schauble considering accepting greater inflation, prompting shocked headlines in the German press questioning the safety of the Euro as a store of value.

    The Fed remains open to more stimulus and is keeping rates low. Most central banks are turning more dovish, like the BoJ, ECB, BoE, and RBA just to name a few.

    Such policies may be the best for their economies and debt burdens, but risk gutting the value of assets held in most of the most widely held currencies. There are safe, relatively simple ways to protect yourself without opening bank accounts throughout the world or hiding gold bars under your bed.

    However you do need to prepare yourself, because just like you need to be diversified by asset class and sector, so too you need to diversify your currency exposure, and not be hostage to the policies of any one central bank or government. Even if you spend in one currency, you're still exposed to its loss of purchasing power. We'll have an article up detailing how this much beloved (by politicians) tax works within the coming week - stay tuned for: The Most Common Fatal Investor Mistake: Inadequate Currency & Hard Asset Exposure.

    I've been thinking about solutions for the past number of years, and have set them out in The Sensible Guide to Forex: Safer, Smarter Ways to Prosper from the Start (Wiley & Sons, 2012).

    A wave of advanced review have been very favorable, as it's the first book to show mainstream investors how to get forex diversification while avoiding much of the risks and complications involved in traditional forex trading that have made this market too risk and unsuitable for most investors. We hope to have these reviews, as well as book excerpts and ongoing conservative investment and trade ideas up as the companion website comes online soon and begins its build out.

    Stay tuned.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 12 10:04 PM | Link | 1 Comment
  • COMING WEEK MARKET MOVERS: NINE REASONS TO STAY ALERT THIS WEEK

    The following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week's market movers and trade ramifications.

    See Part 1 for prior week market movers

    The coming week belies the saying "sell in May and go away." Below are 9 very good reasons to stay alert this week. Actually I've counted 11, though the last two are of significance only for those with position in the UK or Australian markets, or in the GBP or AUD.

    1-3. REACTION TO ELECTIONS IN GREECE AND FRANCE

    France: The projected winner, the socialist candidate Hollande, introduces near term uncertainty because some of his stated policies are at odds with those of Germany and so threaten the unity of the EU's Franco/German leadership, and so risk further hampering its ability to act. That makes some kind of EUR pullback likely. Whether that pullback lasts depends greatly on whether he succeeds in calming markets by appearing conciliatory and flexible towards Germany. An upset Sarkozy victory avoids that uncertainty and so would likely be positive in at least the short term for the EUR.

    Greece: The result here is less likely and the risks to the EU are greater. If opposition parties that did not provide written commitments to fulfill enact austerity steps demanded by the IMF, that could mean the swift end of further aid, a messy Greek default that could easily spark a panic induced wave of similar sovereign and banking defaults unless the ECB and Germany agree to engage in a new round of aid or money printing to fund yet another bailout. If the past years are any guide, after a bit of drama Germany gives in and opts for avoiding a crisis now, at the risk of a bigger crisis later when Greece defaults on yet even more debt.

    Italian & German Regional Elections: Not nearly as important as the above but they could still hurt risk appetite if they suggest growing opposition to the EU.

    4. DELAYED REACTION TO US JOBS DATA, ESPECIALLY IN ASIA

    Because US jobs reports come out after Asia closes, it's reaction doesn't come until the start of the following week. Unless some great news comes out before then to balance the bad US job figures, Asia should open lower. The above elections could provide that balance, or greatly exacerbate the negative response from Asia.

    That makes market response to these elections important, because a strong pullback in Asia to start the week could introduce and additional bearish factor….

    5. BREAKS BELOW TECHNICAL RESISTANCE LEVELS FOR MAJOR RISK ASSET MARKETS

    As noted in our weekly review of the prior week, many closely watched markets are now testing strong support after last week's pullback. A significant break below that support risks setting off a wave of sell orders and pullback that could feed on its own growing momentum as that breaches multiple support levels. Remember that many risk markets like the S&P 500 remain near multiple yea highs despite months of steadily growing signs of slowdown.

    6. COMING BANK DOWNGRADES FROM MOODYS

    As we noted last week, Moody's said they'd be releasing credit rating updates starting in early may. Given the relatively light economic calendar this week, any big surprises here could have disproportionately large influence on markets for good or bad. Many may be in the presumed healthy Northern Europe, so downgrades could be especially worrisome.

    7. ITALIAN BOND SALES

    Italian bond auctions on May 11 and 14 will provide the latest look at Italy's creditworthiness. Given the light economic calendar this week, a surprise here too could have an unusually strong influence on market sentiment.

    8-11. OTHER TOP CALENDAR EVENTS

    After the above, the coming week's calendar is relatively short on likely market moving events.

    • US: The only significant US calendar reports are trade balance and jobless claims on Thursday followed by producer prices and the University of Michigan Consumer Confidence index on Friday.
    • China: Risk appetite will therefore pivot on Chinese data, of which we have plenty. Trade, inflation, industrial production and retail sales reports are all scheduled for release. Based on the latest PMI reports, As long China continues to be in "soft landing" mode, it poses no major threat to global growth. However, if next week's reports show China slowing hard, we could be in for some additional volatility as a simultaneous slowdown in China and the U.S. would be bearish for the global economy.
    • UK: Also, the BoE has a rate statement coming out, and monthly manufacturing production report, both of which could be significant for those with short term GBP positions
    • Australia: There's a batch of important Australian retail, jobs, and other data that should be watched by anyone with short term AUD positions (in addition to the above China data, to which the AUD is particularly sensitive).

    Consult any good economic calendar like that of forexfactory.com for details

    CONCLUSIONS

    Here are the key take away points.

    BEST CASE SCENARIO - RELATIVE QUIET, WORST CASE, HARD SELLOFF

    This is the kind of week that could be very wild or quite, depending on how the above 11 market drivers interact. If the early week combined reaction to the elections in Europe and US jobs figures avoids a pullback strong enough to decisively break through current support levels that could ignite a wave of sell orders that start feeding on each other, then barring any major bearish surprises, markets have a good chance of avoiding a pullback. Given the overall bearish tone and potential for pullback, given the already elevated prices of most risk assets, that's the likely best case scenario.

    DIVERSIFY YOUR CURRENCY EXPOSURE

    Regardless of what happens, most major central banks continue pursing low rate, easy money policies that are likely to ease their debt repayments, but at a cost of cutting the value of their currencies and anything denominated in them- including your assets.

    Therefore, just as you diversify by asset class and sector, you need to diversify your currency exposure. There are a range of low risk, simple ways to do this without engaging in the kinds of high risk demanding forex trading at which most fail. The best and only guide to currency diversification for the risk averse mainstream trader or passive investor is THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start (Wiley & Sons, September 2012). It's the first book to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex and commodity markets to hedge currency risk and improve returns.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 05 10:21 PM | Link | Comment!
  • PRIOR WEEK MARKET MOVERS: THEIR KEY LESSONS FOR THIS WEEK

    Lessons & Ramifications for the Coming Week

    Part 1 of Weekly Review/Preview: Prior Week Market Movers & Their Lessons For the Coming Week

    The following is a weekly summary and strategy guide for traders and investors, covering prior week's market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options.

    See Part 2 for our weekly review of what to watch for the coming week.

    In last week's weekly preview, we warned that our perception about the state of the global economy could change this week. It did, and markets have shown signs of recognizing that the tight trading range on the bellwether S&P 500 was a prelude to pullback and not a further rally.

    For most of 2012, despite building evidence of a global economic slowdown and continued deterioration in the EU (despite the ECB's LTRO band aid), risk assets, including the EUR, have been surprisingly resilient.

    Risk assets just suffered their worst overall pullback in 2012. Why, and what are the lessons for the coming week and beyond?

    First let's take a brief look at the highlights

    Monday: Bad EU, US Data, Spain Worries Drive Markets Lower

    With both Japan and China closed for holidays, the focus was on Europe and the US. Risk assets sold off in both markets, with Europe especially hard hit with major stock indexes down between 1.6% to 2.4%. Driving markets lower were the following reports:

    • Germany: retail data misses forecasts
    • Spain: GDP contracts for the second straight quarter, putting it officially into recession, its banks' credit rating was downgraded by S&P after its sovereign rating downgrade last week. Spain now joined 10 other European nations in entering a double dip recession, further complicating its ability to narrow its budget deficit by 3.2% this year as its tax base shrinks and joblessness rises to ~25%, ~ 50% for youth.
    • Adding to the gloom, a number of analysts noted that the Spanish banking system has crossed the 10% threshold of funding from the central bank - a level at which private markets become unwilling to provide further funding.
    • US: Personal spending down, core PCE price index up (hotter inflation makes QE 3 less likely), Chicago PMI mfg data misses forecasts.
    Tuesday: With Asia Mixed & Europe Mostly Closed, US USM Manufacturing Beat Brings Modest Rally
    • Asian markets were mixed on conflicting data. A surprisingly large 0.5% RBA rate cut lifted Australian stocks and pounded the AUD. Meanwhile China and UK both posted lower manufacturing PMIs, confirming earlier signs of slowdowns in both countries.. Europe was mostly closed for May day.
    • That left the US as the only fully liquid market. Given the importance of the Friday monthly jobs reports, it focused on the upbeat ISM manufacturing PMI data, which bode well for Friday, and rallied modestly, ignoring the negative Chinese and UK data.
    Wednesday: Risk Asset Resilience Despite Wave Of Bad Data Worldwide
    • Except for Asia, which rose on delayed reaction to the US ISM data, risk markets fell on a deluge of bad data. Highlights included:
    • In Europe, we saw a rise in German unemployment (only the second in the past 15 months), a drop in its revised PMI figures, and a slowdown in Italian manufacturing activity. The news caused a roughly 100 pip drop in the EURUSD from its 1.3200 level that shattered the pair's month long uptrend, leaving it vulnerable to a test of 1.3100 or lower. UK construction PMI also fell, though less than expected. The big takeaway between the German jobs and PMI data was that it supported the fear that weakness has hit the EU's core.
    • In the US, a weak ADP NFP jobs report, ominous for Friday's official BLS jobs report, as well as a drop in factory orders added to the bad news from Europe.
    • Yet except for the EUR's 0.75% drop, and stock indexes in Spain and Italy falling ~ 2.5% for the second straight day, risk assets showed only minor pullbacks.
    • Indeed, the prior day had shown manufacturing PMIs falling throughout Europe, as well as in Asia, Brazil and most other emerging markets that had reported. Only Turkey, India, and Russia reported modest increases.
    • One under the radar factoid worth noting: Goldman Sachs noted the significance of April's plunge (-16.7%) in South Korea's exports to Europe (U.S. +5.6%). It called Korea the "canary in the coalmine" because it releases export data earliest and has a high correlation to the rest of Asia.
    Thursday: Market Resilience Broken By Uncertainty Ahead of US Jobs Reports, ECB Restraint, Bad Data

    Then came Thursday, and the market resistance to the waves of negative data broke down. Over the next 48 hours the bellwether S&P 500 decisively surrendered both its 8 session uptrend and the significant 1400 level, falling to month-long support around 1360 to close its worst week in 2012.

    • Asia: Mostly sold off ahead of holidays and uncertainty ahead of the ECB meeting and US jobs reports,
    • Europe: Risk assets were mostly lower after the much anticipated ECB meeting offered no signs of coming easing measures. While Spain was able to sell €2.52 bln in three and five year bonds (beyond it's expected amount), yields were 100-150 basis points higher.
    • US: Risk assets sold off after bad jobs news hit that cast further doubt on Friday's official monthly employment reports. The April ISM non-manufacturing index missed expectations. The jobs component of the report is considered among the best indicators of how the Friday reports will pan out, because most US jobs are in services rather than manufacturing.
    Friday: Another Bad Monthly US Jobs Report
    • Asia: Mostly closed modestly lower on uncertainty ahead of the US jobs report and weekend elections in France and Greece, both of which could produce market moving reactions Monday.
    • Europe & US: The combination of the poor US jobs figures and uncertainty about the French and Greek elections sent virtually all major European risk asset markets lower about 2% lower, and US markets about 1.5%. Crude oil fell nearly 4%. The jobs figures were bad enough to dent market confidence, but not bad enough to raise hopes of coming stimulus, which many believe is the only compelling reason to believe that markets could rally further. This same "bad but not disastrous" view that sunk stocks helped the USD because it raised demand for safe haven assets without materially raising hopes for new stimulus (which would weigh on the USD).
    LESSONS AND RAMIFICATIONS: Markets At The Brink

    The biggest lesson of the week: we haven't gotten our signal yet to start shorting, but we're really close. Here's how we see things.

    Ok, bad data and EU uncertainty hadn't stopped markets from rising or holding steady thus far in 2012, so what changed?

    THE FUNDAMENTAL PICTURE: FUNDAMENTALS WEIGHING ON MARKETS THIS WEEK

    The week brought a particularly toxic combination of:

    • Bad Data In Both Quantity and Quality: We had an exceptionally large wave of significant manufacturing and jobs data this week. The US and China are slowing, most of Europe is too, or tipping into another recession. The US jobs reports, arguably the single biggest calendar event of the month, showed labor participation falling and wages stagnant. That means consumer spending, the biggest component of US GDP, is likely to worsen.
    • Continued Rising GIIPS Bond Yields: Meanwhile, GIIPS bond yields keep rising higher, complicating their ability to buy time by loading up on more debt, and weakening their banks, which have been loading up on these now depreciating bonds via the ECB's LTRO program.
    • Already Dour Context: All this comes after the prior week, which brought news of Spain and the UK back in recession. Spain is obviously a huge concern for the EU as the likely last stand for the EU and EUR as we know it. The UK too is significant, because its struggling even though it has the freedom to print if needed, showing that the slowdown is more than an EU affair.
    • Exceptional Political Risk: Elections in both France and Greece could be exceptionally damaging to the EU's outlook:
    • France: The likely result, a victory for the socialist Hollande, is expected to weaken the Franco/German EU leadership at a time when the ability to act in a united and decisive manner is more needed than ever as Spain and Greece teeter at the edge of the economic abyss.
    • Greece: There is a very real possibility that the election result in enough opposition party strength to prevent Greece from meeting the conditions needed to get further bailout money per the IMF's Memorandum of Understanding (which some of these parties have not signed). If that happens, risk of a Greek default and contagion across the EU periphery rises. Greece has until June 30th to make the additional spending cuts.
    • So this election risks setting into motion a range of unsettling events, including a Greek EU exit and periphery-wide contagion as credit markets jack up borrowing costs to the GIIPS to compensate for the added default risk. These of course risk becoming self-fulfilling, if bond yields demanded from Spain, Italy, and Portugal become too high and the EU's bailout funds become quickly overwhelmed without new money printing, to which Germany could well object.
    THE TECHNICAL PICTURE: BENT BUT NOT BROKEN

    As we've been saying for a while now, risk assets like the S&P 500 index being at multi year highs made them vulnerable to disappointments. The accumulated weight of bad data may have finally caught up to them.

    Here's the S&P 500 weekly chart for perspective, followed by a few key observations.

    ScreenHunter 01 May 06 00 20 Prior Week Market Movers: Their Key Lessons For This Week

    S&P 500 WEEKLY CHART DECEMBER 2009- APRIL 2012

    Source: MetaQuotes Software Corp, globalmarkets.anyoption.com 01 may 06 0020

    Bearish Signs

    We have a nascent downtrend forming over the past 5 weeks

    For the 4th time in 5 weeks, the index is now decisively below its Double Bollinger band buy zone, meaning the upward momentum of the rally that began in September 2011 is likely finished

    The 10 week (blue) and 20 week (yellow) EMAs are flattening out, another sign of lost momentum

    Bullish Signs

    Key support for 2012 around 1360 has held.

    CONCLUSION

    We've said for weeks that despite the bearish picture we wouldn't be shorting risk assets until we see signs of a trend reversal. We still don't have that until we get a decisive move below 1330, which would take us below the support of the 20 week EMA. Only then can we say that the uptrend is not merely bent but truly broken.

    If we get that signal, here are some assets to consider shorting:

    Guiding Principles

    Look at assets related to the EU, the epicenter of the trouble, then China, or more likely Australia, as its markets are generally an easier play on China. The US remains the least dirty shirt in the hamper for now.

    Major Stock Indexes

    Check your charts for which particular index offers the best entry points, as most move in the same direction.

    Commodities
    • Oil: In general, crude oil tends to exaggerate the moves of the major stock indexes, so depending on your time frame, WTI or Brent crude charts (or their ETFs) might offer lower risk entry points.
    • Gold: Reflecting the fact that is NOT a risk asset, it has held within its tight trading range this week. However it's unlikely to make a move higher until we get a new bought of fear about the EUR's continued existence as we know it. If so, we'd be looking to be LONG gold, though we haven't yet set what kind of break higher we'd need to see to suggest a new uptrend. Stay tuned.
    Forex

    If things break down the only question is, which of the 3 major safe-havens, the CHF, USD, or JPY do you like most vs. the highest risk AUD, NZD, or EUR? We would not be shorting the CAD right now (a separate discussion). If fear gets extreme, the USD is the obvious choice. If not, the answer depends on whether the BoJ and SNB continue to strive to keep the JPY and CHF low. The most likely scenario is that in the next bout of EU crisis, the SNB could be forced to abandon its EUR purchases and CHF sales that fund them, and the CHF could spike hard and fast.

    Alternatives To Play All The Above: ETFs & Binary Options

    Those without forex or commodity accounts can play these via the ETFs, but, check how the ETF is structured to be sure you know what you're getting.

    Alternatively, the simplest way to play a forex trend is via forex binary options. We prefer only those with weekly or monthly expirations, because they give the fundamentals time to play out, so stick to brokers that offer these, like anyoption.com (full disclosure, I provide content for them). Daily forex trends are harder to forecast, so be careful about binary options with shorter expiration times.

    Binary option accounts can often be set up and funded very quickly, so don't let you're not having an account stop you.

    Don't Neglect Currency Diversification

    No prudent investor would have everything in one kind of asset class or sector. With most major central banks actively weighing when to begin further rounds of stimulus or rate cuts that risk cutting the purchasing power of their currencies, it's equally foolish to have everything you own denominated in one currency. Bernanke & Co. think we must just accept their stealth tax. No so.

    Getting that diversification needn't be complex, nor risky, if you're prepared. Here's your best source for simpler, safer ways to do it: is THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It's the first book to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex or commodity markets to hedge currency risk and improve returns. See my profile page or the above link for details. Call this naked promotion, but I feel like the guy selling lifeboat reservations on the Titanic. A minor annoyance, until suddenly…. Better to be safe than sorry.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 05 10:17 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.