CTS Spotlight Blog for November 16th, 2012

Hello and welcome back to CRI's CTS Spotlight Blog.

11/16/12: The US dollar continues to show strength as now a rapidly hotting up situation within the middle east adds to a general risk-off environment. Of particular note this week, Europe\'s woes are starting to show in earnest among the bigger previously thought impervious nations of the North. Austerity may be this generation\'s 1930s tariffs. One by one the PIGS nation\'s of Europe have watched their own economies crumbled in the face of dramatic self imposed GDP reductions. Now it appears it is Europe\'s leading northern economies\' turn (this week\'s WCTS focus). Hopefully, the academics within North America can talk the lemming (North American economy) off the cliff (the fiscal-cliff rather) before we too shoot ourselves in our collective feet. Elsewhere, grain prices look to have indeed topped heading into the demand driven portion of their marketing year. Since global growth is currently in question and a risk-off atmosphere prevails, the cure for high grain prices at the moment seems to be indeed that - high grain prices.

As a follow up to recent posts regarding the noticeable bottom in the US dollar index and corresponding top in the Euro-FX, I though we ought to take a look this week at the coincidental breakdowns in the European stock markets. This collective break is significant in itself as the fundamental news out of the region seems to be rather bleak. This past week saw the Euro-zone officially fall into recession (News Link) with growth expectations pegged for the 2013 at a whooping 0.1% (and that may be optimistic). Interestingly, of specific note this past week, German itself is starting to now starting to feel the pain as its ZEW Economic Sentiment reading came in much worse than expected. Austerity is taking its' bite, people are expecting contraction and it is now feeding on itself. Money multiplyer theory would suggest these economies will not only feel the effects of the government mandated cuts but also the ripple effect of the cuts and then the ripple effect of the ripple effect etc. Europe does indeed have a long fundamental road to recovery ahead of itself.


So with this fundamental backdrop, lets take a look at the technical picture and see what it has to say. First off, it would appear the breakdown in the UK & Germany are well contained within broader bull markets. This supports (for the time being) the notion that the 'rich' northern nations of Europe are in better shape than their southern neighbors. Having said that, neither of these countries could break their 2011 respective highs so a failure here may lead to a serious test of said uptrend. Italy on the other hand is firmly within a bear market and the recent failure came well below previous peaks suggesting prices ought to test recent lows at some point in the not to distant future. It isn't even worth looking at the 'PIGS' nations charts - they are all much worse. This brings us to France - where I believe the market's attention is closely focused. France is right on the edge of doing ok and breaking. Notice the battle at the previous peaks not seen in Italy. Notice too the failure just this past week through our most recent support low. Notice too, a break of this uptrendline leads to a lot of open space. I for one shall be watching the developments out of France closely for any tells as to how bad  bad might get.

The entire globe seems fixated on the US and it's fiscal cliff while not paying much attention to what is going on in their own back yards. As mussed about in my CTS commentary, it would seem North Americans take these kinds of 'cliffs' more seriously than in Europe. And indeed, it would appear politicians over here are listening (News link). I wouldn't be surprised to see a catalyst around this event. At the same time I do not see the same interest out of Europe at the moment. This to me feels dangerous as investors there seem reticent to the fact that prices are heading lower and their economic situation is gong to get worse not better in the near future - European stock investors beware!

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com

http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
http://www.therationalinvestor.ca

CTS Spotlight Blog for November 9th, 2012

Hello and welcome back to CRI's CTS Spotlight Blog.

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

http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
http://www.therationalinvestor.ca

CTS Spotlight Blog for November 2nd, 2012

Hello and welcome back to CRI's CTS Spotlight Blog.

11/02/12: The previously mentioned piercing of the 80.31 level in the US dollar index proved to be a significant event but wasn't truly confirmed until the later part of this week's trade. While its' previously registered bull ab=cd target may be a little aggressive, the index is moving higher and a test of the mid summer peaks isn't out of the question as we approach the 'fiscal cliff'. Will this coming Tuesday provide any real surprises? Considering intrade.com has Mr. Obama wining by a margin of 66% to 33%, a 74% likelihood of the Democrats keeping control of the Senate and a 94% chance of the Republicans winning the House - a surprise doesn't seem likely. Indeed, four more years of same old same old as we march toward the anticipated 17.5 year 'fear' cycle peak in Q3'17.

As we approach the all important US Presidential and US Congressional elections this November and the looming 'fiscal cliff' come January I thought it would be of some value to take a look at the US dollar index itself in earnest ahead of these events. 

Since we are all familiar with our 35 year generational cycles and its effect on money flows (if not then I highly encourage you to do a refresher on my Macro Economic Trends webinar) then we know that during the 17.5 'fear' cycle (of which we are current in year 12 of 17) the US dollar Index itself will represent a fear vote in the market place. In essence, when the market is fearful money will run into the Dollar, when it isn't it will explore alternative 'riskier' assets - hence the term 'risk-on' vs. 'risk-off' trade. Simply put, one can glean the general happiness of the broader market during 'fear' cycles by how poorly the dollar index is doing.

So with this backdrop in mind lets go take a look at what is actually happening. Clearly the US dollar index has been well contained within a bull trend since the significant weekly/monthly double bottom registered through 2011. Until a corresponding double top comes in my general hunch is to expect higher not lower prices from here. Indeed, if one where an advocate of higher highs and higher lows defining a bull market (of which I am) then we see that the Index has been successfully registering higher highs and higher lows for quite some time. Conversely, tops of late (like the one seen over this past summer) are 'V' shaped meaning price goes straight up and straight back down. This in itself isn't the hallmark of a bear market but one rather of a bull market (something to keep an eye on going forward). This past 'correction' is telling in itself too. The fact that the market came right back to the 1 year 50% retracement level, did not break the previously registered double bottom and has now itself put in a new double bottom (with the break above 80.31) all suggests this bull is rather healthy and normal in nature. A trade through those recent lows (78.6) & the 50% level (78.55) would cause me to reconsider but considering the potential upside objective (85.30...see below) and one ought to at least consider the long trade (80.31) from a risk/reward perspective (ie 1.80 risk vs 5.01 reward).

Technical outlook: So if we are pointed higher, where should investors expect this market to go? I personally have four bullish targets in mind should this little double bottom of late hold. Firstly, I shall expect the market to at least attempt a 50% retracement of the late summer selloff (currently 81.42 area). Once there, I shall look for the market to move into the OTE Short Sweet Spot (currently 82.58). Should price continue to point higher my next target shall be the summer peak (84.245). A break above this high would in itself represent yet another longer term bullish signal for the Dollar Index (and a very large 'fear'/sell signal for the broader market) and would suggest that the previously mentioned bullish AB=CD target is very much still in play (currently that target is near 85.30).

Fundamental drivers: So with all this US Dollar technical bullishness I have to ask myself what are the fundamental drivers for such a move going forward? I believe the US economy (and by default then the world economy) is heading towards a massive contraction very much like the contraction seen in the late 1930's (almost 10 years past the '29 crash) that literally laid the ground work for the 2nd world war. The looming US 'fiscal cliff' and the now completely failed 'austerity measures' of the PIGS nations of Europe are very much like Germany refusing to make WW1 reparations in the 1920's. While in the short term they are headline catchers and make for good political fodder, these kind of policies have far reaching consequences for national currencies, domestic economies and play right into the 'fear' cycle scenario. Indeed, very rarely do we see economists agree on an outcome; yet here it would seem they all agree that an economic contraction (dare we use the 'R' word) is coming, the question is how big (Reuters news link).

We know commodity prices will boom into 2017 which also means paper assets will bottom. That event is just under five year away and we will be guaranteed to see some very wild price swings over the interim. The combination of global competitive currency devaluation (QE programs) coupled with bad debt being piled upon more bad debt (historic budget deficits) has pretty much guaranteed our anticipated 'fear' cycle peak outcome - the only question now, how violent will violent get....and unfortunately, it can get pretty ugly around these 'fear' cycle turns...

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com

http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
http://www.therationalinvestor.ca