Its back to the office time guys so a longer update. I hope you enjoyed a relaxing summer break as here we march into September.
August is behind us and we enter the most bearishly biased month for equities in the year. Sept 15 and 16 were bearish months, of course the Bear Sterns, Lehman brothers, melt downs occurred in September and on and on. These seasonal patterns are not guaranteed but its surprising how strongly they re occur year on year.
Its a good point to note the major technical themes. We have a loss of price momentum in US equities and in many index cases, eg Russel2000, Tech, soxx, Nyse, etc, the healthy correction has already started. This has yet to be felt in the major US indexes eg Dow and Sp500, but the breakdown appears set up nicely for Sept.
European indexes broke down early in local currency, Stoxx50, Dax, Ibex35 etc. In US$ the correction is still yet to occur. Across world indexes, European indexes have certainly provided a local currency beta to the downside, though much is currency driven, ie FEZ performance. (I commented on the euro some months ago and suggest upside to the 1.205 level. It appears this area will form its medium term top building loss of momentum process). On a euro breakdown vs the USD expect a local currency out performance for its indexes. I like the set up pattern wise on the Euro bank index (ETF EXX1, bull flag, 12.8e. And if the euro banks do perform again it will support more consumer lending to allow euro consumers to back fill the demand they offset for nearly a decade now. Needless to say Draghi would then quickly hit his inflation target. Its all about credit or rather achieving a sustained period of credit expansion, which opportunity the euro area now has.
World indexes are in most cases performing with an out performance in Asia and some good macro and micro news flow out of China and the region. (Chinese banks strongly exceeding expectations and lowering their non performing loans provisions in some cases).
(Without wishing to teach anyone to “suck eggs” a quick trader practice reminder here. I say this to the PIs on this feed, choice of instruments is half the secret of success. To fully participate in the directional performance of indexes you have to do so via leveraged instruments unless you have an account that can borrow or sell short stock, etfs. Futures at the high end and cfds at the more granular end are excellent ways to participate in direction without being exposed to the currency. Enough said. Eg if you are bullish euro stocks and have a forecast that the euro is about to weaken then a directional bet long on euro stocks via a cfd on the stoxx50 would be a good way to participate. As a leveraged instrument you are not exposed to the fx debasement in the same way you would be via a cash participation in say a euro etf on the stoxx50).
Commodities wise, a mix of Chinese improvement, US$ weakness, geo politics and to a lesser degree forward inflation expectations (TIP 114.2, need it to break 115), has been driving the price moves. Copper has pushed on for yet another week, gold has joined, and other metals even as bonds push still higher (see fitzpatrick below). (Silver, Platinum very bullish. Silver has a lot of catch up on gold and copper from here, tactically the us$ strength making the tactical entry here on the chart lower conviction). One of these prices is a mkt mis price so an asymmetric trade presents for aggressive traders. Time will tell which but its plain to see many commodities relative to equities and bonds look very inexpensive here. Cycle wise, if we are end cycle wave 5, commodities should be the alpha historically pattern speaking.
Here the Swiss team with their latest report:
Here Fitzpatick
Fitzpatrick filling in the gaps that the swiss have not commented on. Copper’s moves are a lead and must be noted for many reasons inc China that Fitzpatrick also notes. (Id add, as previously said, also on inflation. USD AUD is not correlating well for moment. (Another mis price? Quite possibly and worthy of an entry around the 77.5 level if she shows).
Here UBS USA with their ground up technical look at 49 of the largest US stocks. Note more downgrades, technical near term weakness.
FX wise eurusd aside, all participants appear to be talking Eurgbp parity which probably means the trade is full near term and needs a little correction. The counter cyclical UK economy out performing world growth for so long off the back of very strong domestic housing market, large capital inflows into uk property from rest of world and very strong consumer credit growth as european banks reduced consumer lending for a lost decade set the macro up perfectly. When the technical price chart setup it was a high conviction trade as flagged here many many times. I continue to hold with an eventual expectation of 1:1 and more accepting tactically that a price correction is likely and healthy.
Here SC on the fx side of things:
Note also the gbpusd. The lows are likely to come back into play in my view. The bounce has been be lack luster with very little momentum. Lower lows a strong possibility in the year ahead. (Positive for UK large cap equities of course and if the cyclical sectors of commodities and banks move on as i expect then the ftse100 could be one of the lead indexes, though be careful of holding the index in cash due to the gbp debasement issues. Better to borrow the stock or use cfds etc).
All the best guys
Rich