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Silver Linings

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...the time horizon of your investment strategy--and your ability to actively manage risk--will likely dictate your next move.

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Well she's walking through the clouds
With a circus mind that's running wild

(Jimi Hendrix)



So there I was, sitting in the television studio Monday afternoon in the middle of the Bloomberg World Headquarters. It was a quiet day in the markets, due in equal part to the Columbus day holiday and the brilliant sunshine that littered the land of Gotham.

I had my shtick down. After all, I write about the markets all day and think about them most nights. As the lights flashed to life and the camera turned my way, I began my bent on the relevance of the commodity action and the newfound trigger that is the U.S Dollar.

"Commodities, as measured by the CRB, broke the five-year uptrend six weeks ago," I offered as they ran the attendant chart, "I thought, thus far incorrectly, that this would weigh on equities through the lens of asset class deflation vs. dollar devaluation."

Pulling up a chart of the Dollar Index, we eyed the very same dynamic in reverse. "The dollar, as measured by the DXY, is now probing the five year downtrend. If this pops through to the upside, it would be another significant sign that the great reflation trade may be unwinding."

As we turned our attention to the equity realm, interviewer Michael Mckee asked me what I thought of the S&P. "They act great!" I said as a reflex, somewhat surprised by the tone of my own voice. "S&P 1340 and BKX 114, if you're a short-term trader, offer excellent defined risk parameters for a long side try. As long as those levels hold, the upside deserves the benefit of the doubt."

Wait a minute!

Massive macro imbalances lining up for the bears?

Near-term technical winds at the back of the bulls?

What's a trader to do?

"I think it's important for investors to respect--but not defer to--the price action as there are alotta moving parts in the globalization trade that's taken place since the back of the bubble." Indeed, the time horizon of your investment strategy--and your ability to actively manage risk--will likely dictate your next move.

Circling back to commodities, which may still serve as a precursor to equity action, we touched on the vicious 15% break in the last two months. When asked if this is a healthy pause, I again pointed to the context of time.

"I've been a big commodity bull in terms of energy and metals over tech and financials on a secular basis. I think what we're seeing now is a cyclical downturn within a secular context (remember, the most vicious corrections occur in the context of a bull market).

With that said, we must listen to the markets and hear what they're saying. If asset classes as a whole benefited from the liquidity-based reflation trade, you can actually make the case that equities and commodities are in the same boat versus the dollar."

And if the dollar breaks out to the upside, it will offer yet another headwind for stocks.

Given that the path to our ultimate financial destination is defined by the profits of our journey, we must balance our four primary metrics and assimilate them in kind.

  • The technical picture is bullish (above S&P 1340 and BKX 114).
  • The structural picture is tilting bearish (will confirm with further dollar strength).
  • Fundamentals are coming down the pipe (starting with Alcoa this evening).
  • Psychology, the most intangible of our inputs, is either in the midst of a bullish migration or the early stages of bearish denial, depending on the next five percent.


Any way you slice it, the risks inherent in the equity realm are increasing in a cumulative, ongoing basis. The compression in volatility and complacency suggested by various sentiment measures talk to this evolution although, please remember, they're not downside causation. In fact, until they matter, they'll serve as noisy distractions in the ongoing and ever-present performance anxiety that's come to define our immediate gratification marketplace.

With an avalanche of earnings on deck, I'll ask you to please maintain your perspective as the news files through the pipe. While some will view our current juncture as a Goldilocks environment, I'll offer that simply we're stuck between heretofore perception of higher inflation and the looming reality of a global slowdown.

That may not matter as we put one foot in front of the other. But for those looking to book a longer upside vacation, you might want to check the cancellation policy on your buy ticket.

Good luck today.

R.P.

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Positions in energy, metals, financials
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