There were some big players that came in and tried to sell risk assets after the rather sickening can-kicking act that DC politicians pulled this week. However, when the bears couldn’t get any traction with their downside bets, they quickly threw in the towel – allowing the markets to post a nice gain for the week despite all the noise.
With a pause in the DC cage-fighting, investors and traders are now able to survey the global landscape and assess the risks and opportunities that exist out there. I hate to be oversimplistic, but from my perch it appears that the global markets and economies are, barring any exogenous events, in for more of the same:
US growth and corporate earnings are likely to remain slow but steady – slow enough for the Fed to keep its foot on the pedal until God knows when.
Europe appears to be on a continued recovery from its miseries from a couple of years ago. There are clearly some “weak sister” countries over there, but they have found the Fed’s methodology of dousing fires with the massive QE hose useful for the time being.
Asian growth is always a question mark for me due to the sketchy nature of Chinese number-rigging. But, until the mass of analysts, traders, and investors are willing to take those concerns more seriously, we have to stay in the game with our investment dollars. From a technical perspective, a quick scan of the charts of the country ETFs from that region show an overall bullish / near-bullish tone. I’ll defer to the market action and set my conspiracy theories aside for now.
The US fiscal situation is now and will likely continue to be messy at best. The flare-ups every few months provide some downside volatility and offer folks like me the chance to put portfolio cash to work opportunistically. There will surely be a price to be paid at some point for the country’s maladies, but betting on that is not an investable thesis right now.
The US monetary stance with Ben Bernanke finishing his leg of the relay and getting ready to hand the baton to Janet Yellen (wait, close your eyes and try to visualize that – now tell me you’re not chuckling) is dovish to say the least. As long as that is the case, the “Tepper Trade” (made famous by famed fund manager David Tepper) is in play. That’s where things are neutral / bad, so the Fed continues to be dovish and the equity market rallies, or things are getting better economically and the equity market rallies because of that.
Let’s take a look at some of the key charts that are helping guide my thinking right now.
In my view, yields on the 10-year Treasury Note
(INDEXCBOE:TNX) are set to head lower – at least to the 38.2% Fibonacci retracement line at 2.467% and likely down to 2.308%. Lower yields >> lower US Dollar >> relative strength in US large cap and international / emerging markets equities in all likelihood. According to the Williams %R indicator at the bottom of the chart, the TNX is oversold and could bounce at some point soon – maybe down at 2.467%.
US Dollar Index
Last week I put forth the idea that if 80.51 resistance held up that the US Dollar Index (DXY) had a very strong chance of trading as low as 79.00. Well, resistance held on a closing basis and the DXY has begun its descent toward 79 and points below. As you can see in the chart below, the DXY appears to be in wave “v” lower of a larger sub-wave lower. The target for wave “v” appears to be around 79.39. At that point, under normal circumstances we would see a bounce in DXY – perhaps as much as a full retracement of the decline that began on 10/16 at 80.75 (intraday high). Given the ongoing intervention by the FOMC in the bond markets, anything is possible – including a straight shot down to the ultimate target of 78.68. Right now, though, I will stick with the idea of a drop to 79.39 and then a bounce (likely corresponding to a bounce in TNX at 2.467%). So, those thinking of buying things like gold as a play on the falling DXY may want to wait to see if the expected bounce occurs so that gold can be bought lower.
Currency Risk Gauges – AUD/JPY and EUR/JPY
Put simply, both of these charts look bullish – confirming the bullish vibe from the S&P
(INDEXSP:.INX) futures chart.
SUMMING IT ALL UP
This “whistling past the graveyard” mindset is a necessary evil right now (better to make money begrudgingly than to be intellectually correct in identifying problems / issues and seeing no / negative portfolio returns). What can I say? This “blissful ignorance” approach to investing will work until it doesn’t. The good news for Minyanville readers is that the charts will typically start sending out warning signals before too much damage is done – and we will all be able to take defensive measures as appropriate. Until then, enjoy the ride!
No positions in stocks mentioned.
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