Sunday, July 12, 2009

Technical Update 26.09

Another low volume week saw the major US indices give back an additional 2% of the spring rally. As usual, however, there were a number of underlying developments in the currency, commodity and bond markets to keep matters interesting.

The equity selloff was widespread across the globe but not equally as mundane. The Russian market lost 13%. Italian, Japanese and Canadian Indices were off over 5%. And most european indices took about a 4% hit. This is consistent with my forecast of weakening fundamentals around the world as the US "muddles through" for the next few months. Eventually, I feel all the major markets will meet the same fate of much lower prices as debt and leverage continue to be unwound.

The German market looks similar on the chart below, but is clearly underperforming.

The US Treasury market had no problem gobbling up an additional 70+ Billion in supply and gained additional ground on the week. Yields fell to 4.2% on the 30-year. Continued strength in the bond market came as a surprise to many who had feared that the Treasury's need to raise money would cause skyrocketing rates (lower prices). But it can be thought of as nothing short of amazing that amid all the increasing budget deficits and unfunded liabilities that are mounting, investors are still willing to accept such a low rate. Why would they do this? Well, for one thing, the savings rate is rising among the average consumer. And second, they obviously feel that there are no better investments to preserve their purchasing power - hallmarks of deflation. Unfortunately, for the economy in general, treasury bonds are probably the worst investment that could be made. If a robust recovery is to be had, we would expect to see money flowing into the early stages of production - capital investments that leave us with wealth when they are finished. That isn't happening yet. Most businesses are still in the process of downsizing and deleveraging while any spare cash gets recycled into treasury bonds.

This may or may not make long term bonds a good buy at these levels. I am not, however, expecting to see much lower prices anytime soon.

The currency markets continue to be where the action is. The Japanese Yen had a very strong week, perhaps a sign that the carry trade is again being unwound. This is something that has kind of fallen off the radar of late, but was a harbinger of pain to come last summer. I prefer to watch the Euro/Yen cross, which itself had a very large move last week. Continued adverse movements here will likely portend a continuation of Dollar strength.

The Dollar, however, has made a series of lower highs in the last few weeks, which is not exactly what one would want to see if they were a bull. There is a possibility for a new low that would draw an elliott wave "5" down on this recent "C" wave of the move since March.

And finally, the commodities markets saw additional weakness this week as well. The CRB index posted one of the weakest recoveries among asset classes that got smacked in '08 and is now leading the way down in this correction. I'm looking for substantial new lows in commodities in '09.

Have a great week!

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.


Roger J said...


I guess these are of some interest:
most indices, including those of emerging markets, are forming either potential double tops or H&S on their daily charts.

From volume (declining volume) and RSI (weaker w/ more recent peaks), they appear to be valid as well.

S&P 500, DJIA, German DAX, Bombay Sensex, Brazilian Bovespa, Australian Ordinaries, Japan Nikkei

(Potential) double tops:
Nasdaq, Hang Seng, Indonesian (^JKSE), Dow Transport (since mid-June)

London FTSE seemingly didn't manage to rise as high as GDAX, doing worse... it more looks like a flat top.

Given all of these, do you still stand by your "feelings" that those indices or at least the US markets can hold up till next year? They sure look very weak now.


Matt Stiles said...


Yes. I think they could hold up through year-end from a technical standpoint. Fundamentally, structurally and psychologically I can't see that happening. So it kind of depends on how you weight the importance of the different analytical methods.

Be prepared for either outcome and don't put all your eggs in one basket.

Josh said...

On an unrelated note, the owners of a pizzeria are getting stimulus money to buy a new building which will have give them more tables.

How much more of this nonsense can Americans take.

Matt Stiles said...

"How much more of this nonsense can Americans take."

I don't know. But there will be a tipping point. Likely once it becomes apparent that none of it has worked. Obama's honeymoon will end and it will get nasty.

Josh said...

Have you seen the PPI data? I believe we are in for an inflationary spike if the Fed doesn't reverse course soon.

View My Stats