11/09/12: In what can only be described as a classic 'buy on the rumor, sell on the news' event, the pre-election rally (on the hopes of a long shot win by the GOP challenger & a promised tax cut) not only cleaned out many weak shorts but also relieved a rather over-sold market condition. The subsequent price failure not only took back the rally but also broke to new lows in many cases. Meanwhile, the very noticeable bottom in the US dollar index continues to build as many of its major trading pairs are looking rather weak compared to the greenback. What is most interesting to me, is how quickly the major media outlets have switched their attention from all out election blitz to the impending 'fiscal cliff'. Indeed, as I have been worrying about for a while, we ought to see some sort of climactic capitulation around that event. Having said that, the event itself is a little over two months away and given the fact that the public is paying attention (and selling into the media frenzy), it wouldn't surprise me to see a bit of back filling through this seasonally bullish time of year.
As a follow up to last week's post on the weekly US dollar index (and its associated potentially bullish turn) I thought we could take a moment this week and look at its major trading pairs (Euro-FX & Yen) and see if they are trying to tell us anything. The chart on the left above is of the Weekly Euro-FX vs. the US dollar and the chart on the right is of Weekly Jap. Yen vs. the US dollar. These two charts seem to correspond with the general tone in the Greenback - that being a move away from 'risky' assets and a preference toward those of the most trust-worthy central banks. Specifically, The Euro-FX broke down this past week just below a key resistance line. This failure below the 50% level suggests inherent weakness and does suggest a test of this past summer's lows may not be too far off. Notice too, the tops on the Euro are rather rounded (with multiple tests of the highs) while the lows are all 'V' shaped and rather violent. This in itself is a hallmark of a bear not a bull market. Switching to the Yen, we see that it just recently tested its 50% level and once again it held up. In what appears to be a consolidation just below the recent extreme highs, the 50% level has become a defacto neckline of a massive Head & Shoulders price pattern. If so, one ought to expect some sort of 'right-shoulder' price action over the coming weeks/months ahead.
Since we know Euro-land interest rates are general still higher than both the Japanese and US rates, we must assume that if Yen and Dollar are rising in unison vs. the Euro we must be in a 'flight to safety' market. As a fundamental back drop, I believe this news article from Bloomberg summarizes the 'risk-off' environment that currently dominates the investment landscape.
Between the 'PIGS" nations of Europe (and their on-going debt sagas) and the pending US 'fiscal cliff' there is plenty for investors to be concerned with going forward. Having said that, I think if an investor gets wrapped up in the short term market gyrations they often miss the bigger picture (seeing the forest through the trees). Something significant is going on and I don't think it is being fully appreciated. If we look back at our longer term cycles we ought to notice that The US Dollar usually underperforms through its 17.5 year 'fear' cycle. The D-mark & the Yen appreciated dramatically through the last two cycles (Nixon taking the US off the gold standard and Roosevelt's currency devaluation) and the same ought to hold true today. One should not be surprised to see a powerful long term uptrend at work in the Yen. and it shouldn't surprise anyone to see efforts by Japanese Central Bankers to reverse that trend as futile. Here lie's (in my opinion) the current market conundrum that seems to be missed by many. A German based currency should be very strong right now too. This in itself should keep German exports in check - but it isn't. Because of the 'PIGS', international investors are reluctant to buy the Euro and German companies are enjoying massive 'artificial' gains. At the same time, Euro central bankers are offering the market a premium (spread between short term interest rates to that of the other 'reserve' currencies) and the market still doesn't want their paper. Something has to give...
I for one am not quite sure how this is going to resolve itself but it is an ongoing concern I have. How does a situation like this usually resolve? I do recall reading stories of many 'market wizards' who got their big break by seeing a significant change coming and building a relatively low risk position into that event, I wonder if this is one of those situations? Something I will give considerable thought to going forward and maybe you ought to too...
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
the_rational_investor@yahoo.com
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