Intermarket analysis is as important as ever in the 2012 investing environment. We will first look at the chart of the USD, which will provide insight into the movement of various other assets.
Long Term USD Technical: Looking at the 2 year chart of the dollar with a fan line overlay, the long term downtrend of the USD seems on the brink of an uptrend. The current technical position, just below the 3rd fan line, signifies a period of consolidation however.
Long Term USD Fundamental: The dollar has resumed its status as a safe haven investment. The somewhat diminished fear of further USD devaluation in the form of quantitative easing has allowed for its more normalized price action. This status as well as the fall of the euro over European economic issues has led to USD appreciation over the latter half of 2011.
The USD 1 year chart conveys current movement of the dollar on a more micro level.
Short Term USD Technical: The end of quantitative easing earlier in 2011 led to a period of trendless movement in anticipation of what monetary policy would do next. In late October when fear somewhat diminished of further easing and the economy continued its slow but positive recovery, the dollar began to strengthen. It has subsequently had two uptrends followed by two corrections. At the current level the consolidation is intact waiting on another upward move.
Short Term USD Fundamental: As of late, the USD has strengthened due to its risk off nature in an environment of heighted volatility. It has also garnered the perception as the lesser of two evils when compared to the euro. Both were viewed as weak earlier in the year, yet the Fed's direct depreciation gave the euro the edge. Now the edge looks to be with the dollar. However, when the next EU summit approaches look for euro strength on speculation as seen with previous summits.
Brent has seen its share of volatility in the face of geopolitical and natural disaster risk, and it looks to continue into the new year.
Oil Technical: Oil saw a massive depreciation in the middle part of 2011, yet in late 2011 tended to reside at the upper range of its downward channel. With consideration to geopolitical risk and potential future weakness of the dollar (sitting at a resistance point), oil could be in an environment of further upward movement.
Oil Fundamental: Oil had its early 2011 run-up to $126 in the face of a depreciated dollar and geopolitical risk with the Arab Spring. Then with the fears of a declining world economy and the lack of quantitative easing oil entered a massive bear market. Currently, the outlook is improving, but the dollar strength has been a known adversary. In the short term, with the lack of a wildly appreciating dollar and more geopolitical risk, Brent could see a further run up.
Gold had its run in 2011, yet looks to return to a more normalized move in 2012.
Gold Technical: Gold has yet to break its uptrend and has seen support at the first fan line. By entering its exponential move in mid 2011 it was expected that a massive correction was coming at some point. Gold's current hurdle is its 200 day MA at $1625, but upon breaking this it should resume its uptrend.
Gold Fundamental: Gold in an environment of a depreciating dollar, heightened volatility, and worldwide economic risk looked to be the only safe haven throughout much of 2011. This led to it becoming a volatile asset in its own right. With a stronger dollar and the need for liquidity, gold's exponential uptrend looks to be tempered. Look for gold to continue on a more normalized uptrend in 2012.
What This Says About Equities...
The long run uptrend was violated but showed support at its first fan line during the October 2011 lows. In mid 2011 with the domestic, European, and world economic outlooks deteriorating the S&P had a sell off. Then it entered a period of consolidation and volatility in anticipation of its next move. With the realization that the economic recovery would be slow and the euro situation could continue to be kicked down the road, equities recovered some of its panic sell off. Currently sitting at resistance levels, the S&P still looks to show potential for short term gains. The euro will gain strength with its upcoming summit speculation and with steadily improving economic news, the environment should be friendly to an appreciating market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.