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Cash May Trump Equities This Week

Cash May Trump Equities This Week
Global interest rate and equity markets maintain their momentum to hold yearly highs, going into a week that is full of red-flag economic releases. Having absorbed a heavy reversal off a test of support on Friday, European and US equity trade went on to close last week at the highs of the year. Friday’s moves lead to a gap higher in Asian equity markets that reversed four sessions of Asian market selling. As earnings season starts to unwind there may be a period of equity consolidation as attention turns this week this week to regional economic reports, and to the reality of next quarter’s earnings having to absorb some heavy moves higher in commodity values that have created inflationary pressures.

The Japanese Nikkei open created a gap in price as this week's trading sessions got underway, which will now battle heavy resistance at 10750. A new long signal will be taken off a test of support, rather than buying a break-out from current extended levels. Nikkei traders will be looking for reversal to 10650 for confirmation that support is in place, and to go long from there when the subsequent signal is created. 
German DAX trade started the week with a move higher in price that tested 7425 as upside resistance, but failed to hold the high ground initially. The buy signal issued on Thursday with a break above 7350 has now completed its 7400 target; it looks as though the path of least resistance will now be for consolidation, as traders patiently wait for a retest of last week's 7350 break-out area. It may be unwise to be looking for new long positions at these extended areas; patience should be practiced whilst waiting for the market to confirm its continued bullish sentiment.
Wall Street equity trade has seen S&P 500 futures reverse off any tests of support during 2011, in-line with the Federal Reserve mandate that is creating equity liquidity via the Primary Dealers on POMO auction days. The buy signal on Friday to go long from 1317 completed its target at 1325, and traders will be now looking for a test of support around 1320 in S&P cash trade during the course of Monday. Although bullish, equity markets will now absorb a heavy week of economic releases from most global regions, which will create intra-day volatility as fair value adjusted as each eight hour regional market opens and closes.

In general, global equity markets are now at an inflection point. Although still very much in bullish mode, they now offer little in the way of decent potential reward when compared to the potential risk that the next test of support fails to hold. In the new generation sound-bite headline world, that creates price action break-outs and reversals out of nowhere, it should be remembered that cash is a position.

When market participants start to bank profit off the moves that have sent equities to yearly highs, cash may become king in the near-term. 10-year Treasury notes consolidating in a six day sideways range, after a drop in value that sent interest rates to yearly highs, are signaling confirmation that cash positions may be just what an overextended equity market needs whilst fair value is adjusted this week.