Calm Before A Very Big Storm
Seeking Alpha Analyst Since 2008
Mid-week trade saw the resumption of equity market buying, with Asian markets holding support as European markets moved higher, which in turn buoyed US equity futures markets. Global sentiment has absorbed the negativity surrounding Japanese economic outlooks, and after sending the German DAX down from a 7500 high in February to hit a low of 6400 in March, the main European equity benchmark is now back to 7250. US equity markets did not suffer the same depth of reversal to support as European bourses, with front month S&P 500 futures contracts trading at 1335, just 15 points below the yearly high.
A weekly chart close above 1350 on S&P 500 trade will be a very bullish signal that, if current sentiment stays in place, could draw in a test of 1375, and maybe even 1400 ahead of the Q1 earnings season. At this point in time, for whatever reason, there is a very bullish undertone to equity market trade. That flies in the face of US administration jawboning that quantitative easing programs may be curtailed, at a time that the Federal Reserve’s FOMC finds itself divided over those members wishing to raise interest rates, those wanting to hold interest rates, and those who want to continue QE2.
Equity markets would certainly have good historical reason to be testing support at this point in time, but as the last two year’s client notes have been highlighting, since the implementation of quantitative easing policies the trading-normal now provides an environment that can thrive on sound-bite headlines, low-volume, and high-frequency trade. However, the reality of a withdrawal in drip-fed liquidity from the Federal Reserve, if quantitative easing is withdrawn, will test heavily the resolve of those wanting to be long and equity market. Add in year-end downgrades and profit warnings from major market participants, and the gravitational pull of reality may prove hard to resist. At the moment however, the usual pattern of buy-the-dips is firmly entrenched.
The US dollar demise has been widely reported over the course of the last six months, which has seen a period of quantitative easing implementation that weighed heavily on greenback valuations and outlooks. However, the percentage moves in US dollar valuations, both up and down since October 2010, are not aligned with the percentage gains or losses in equities, gold, silver, and crude oil.
However much the US administration yearns for a weaker dollar, the reality is that central banks around the world are not prepared to roll over and see reserve asset valuations decimated in order for the US to balance its budget deficits. Currency valuation wars are firmly in place.
The dollar index (75.80) is 6% above the 71.50 area that was previously touched in the last main cycle of major equity and global commodity buying that created the 2008 and 2009 bubbles. The ability for global market trade to hold a weakened dollar at current levels confirms the determination and resolve of central banks around the world to not allow dollar liquidity to further impact their own regional economic growth outlooks. Whatever the outlook, whatever the opinion, and whatever the sentiment, the reality is that the dollar index will struggle to break lower through 75.00 all of the time that S&P 500 futures trade is below 1375.
It will be very interesting to see the reaction to Q1 earnings season, as that will coincide with confirmation from the Fed as to whether QE2 will be completed or not, and will very likely be the instigator of another break higher, or a massive reversal in risk markets to test support. It would seem very unlikely that global markets could hold slow and steady through the upcoming period of trade that will really gain traction from the beginning of May.
Traders could be witnessing the ultimate calm before the ultimate storm. Updates on TheLFB signals that cover equity indices, precious metals, and currency movement will be emailed directly to clients, with full detail sent via daily Client Notes and website updates.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.