Jeff Diercks'  Instablog

At InTrust, we are trend followers and there is no doubt the trend in all equity markets is still up, especially the international markets which have benefited from a falling dollar in addition to a up move in worldwide equity markets.  However, I think we may be different than the average trend follower who waits for the trend to reverse and then blindly follows his/her signals and moves out of the position; we are nervous trend followers.

Because of this rather annoying trait, we are constantly looking at the tea leaves for signs that a reversal may be imminent in one of the positions we follow or invest.  Over the years, we have learned the hard way that the trend can remain intact, but the position or market become short-term overbought.  This is what we are seeing now in many markets, especially the foreign equity markets.

Our research has shown that when an equity moves 5% or more above its 25 day moving average there is a 70%+ probability it will revert to its mean shortly thereafter.  In fact, this can be quite a profitable trade for very short-term traders.  Well, we are now there with many of our country ETF positions and our models are flashing short-term caution.

Of our top ten rated positions by long-term and short-term price momentum, only Turkey and India are still rated "neutral."  If you are thinking about putting on new country ETF positions, it may behoove you to wait for the inevitable pullback in these names.

The million dollar question from this current market move off the March lows is when will it end?  So far, I must admit, I have been surprised by the strength and length of this move.  I know there were moves of this size and magnitude following the Great Depression.  However, as much as my kids may think I lived through this period, I did not!

In our ever vigilant search for clues to the end of the rally, could it be that the greenback and the yen are flashing warning signs no one wants to see.  According to a report by Jonathan Clark of FX Concepts entitled Has the Yen Changed its Stripes,  he writes that "the cycles argue that the financial markets are within two weeks of what should be the start of a period of distress.  The exact reasons for the downward move in stocks and the accompanying decline in risk appetites will only be revealed later.  However, the increase in risk aversion should be related to growing credit losses and weak final demand as consumers struggle to rebuild their savings."

He goes on to say "Normally when this occurs the yen strengthens aggressively as there are short yen positions on both inside and outside of Japan."  We know this latter statement to be true as this was evidenced in the September/October period of 2008 and Non-commercial or "speculative" positions on the IMM are again pointing to significant shorting of the yen that can be fuel for a short squeeze.

A simple review of a weekly spread chart of the U.S. dollar and the yen, shows that this spread is approaching a signifant support level at .70 and could portend a bounce at this level.  You can see from previous bounces at this level that the market generally moves inverse to any positive move in this spread.

The iShares MSCI Turkey Investible Fund Index (TUR) continues to lead the way in our relative performance country ETF models. 


Austria, Sweden, Thailand and Brazil continue to score well in this week's review.

As you can see, below, TUR broke out on Thursday and extended its gains in Friday's explosive markets on higher volume.  The break was also confirmed by an MACD cross.



Positive democratic reforms that allow for investment in all regions of this emerging country have allowed for explosive growth and its investible index, up more than 69.8% in 2009.  A word of caution however is in order as the breakout has not resulted in a significant volatility squeeze of the bollinger bands, so it is always possible we could see some kind of pullback or consolidation at the highs.

Certainly it would not be a surprise that during market corrections, money tends to migrate to stock names that are considered less risky, that generate more consistent profits and generally have more stable stock prices.  Two days into this most recent correction that is exactly what is happening.

The Select Sector SPDR Consumer Staples ETF (XLP) is solidly out performing the broad market as represented by the S&P 500.  Its relative price to relative to that of the S&P 500 price has broken a downward trend line and is moving up on a relative basis.  Price is holding a longer term upward trend line and if it holds here will likely continue its upward move. Its RSI and MACD indicators are poised to break above their signal lines.

The only question is whether money will stay in the consumer staples names when the corrective action ceases or will it again seek risk in names like the consumer discretionaries or technology.

Despite the markets pullback on Friday, its hard to deny the trend of the market is anything but up.  All of the ETFs that we follow on the regular basis to get a read on the market are still pointing up with the exception of the dollar. King dollar, try as he might, has still not broken out of its falling wedge pattern and remains in both a short term and longer term down trend, see below.



Last week most of these ETFs were short-term overbought in relation to their 13 day moving averages (which I would warn is a time to be cautious in the short term).  This week even that issue has been resolved as price has pulled within 5% of its moving average for all of our market indicator ETFs.

The EAFE index (EFA) is now outperforming the other indicators in both our slow and fast momentum models.  This is a big change from one week ago when emerging markets and the small caps lead the way in the slow and fast momentum models, respectively. 

The Nasdaq 100 (QQQQ) continues to lag the international markets, but started to reassert leadership this week moving up in its fast momentum rank to an 89 from 67.  Finally,  commodities, as represented by DBC, lost momentum in our fast models.  This could be a sign the U.S. dollar is ready to reassert itself.  If the dollar does break out of its falling wedge pattern, it will be interesting to see what correlations develop.