It seems that there has been a rather significant rise in bearish commentary coming through the traps over the last week. It also seems that anyone who was remotely bearish over the course of the last couple of months has become even more resolute. We get the feeling that too many punters/players/investors/try-hards are expecting a “correction” or at least a “re-test of the March lows”.
OK so what evidence do we have to warrant this bearish commentary? There has only been two days of weakness in world financial markets over the last week to warrant “raising an eye brow”. That weakness occurred on Monday and Tuesday. However, we feel the weakness wasn’t that significant in equity markets or across different asset classes to warrant the amount of angry bears that have emerged from their dens. What if the Total Market Index (VTI) were to fall to 44 and/or the Emerging Market ETF (EEM) were to fall to 30 (about 7% downside) over the coming days, how many bears would come out of hiding then? We think that at 44 on the VTI opinion would be unanimous that we are off to retest the lows of March.
In support of equity market weakness has been strength in US Treasuries. However, support for the ETF TLT has hardly been passionate. By now we would have expected a close above the 94 level if it were genuinely bullish. Furthermore, the “weakness” in equity markets has not been embraced by junk bond investors. If last year’s behavior was anything to go by, when equity markets sneezed junk bond markets broke to their knees in a coughing fit! This is clearly not the case as of late with JNK hardly changed on the week.
The strength in the USD Index (UUP)is not what you would expect if the markets were genuinely fearful of “risk” this is also confirmed by the behavior of the Aussie Dollar (FXA)which, although putting in a double top of sorts, is far from breaking out of its up-trend that began in March. Let us not forget that the Aussie was absolutely smashed last year and actually led equity markets in bearish phases.
Our experience suggests that markets will go where you least expect them. The tone of commentary coming forth this week suggests that an expectation of a “significant and tradable correction” is now commonplace. We find that there are few commentators who are willing to stake their claim that equity markets are about to go significantly higher. That is where we think equity markets will be over the coming weeks. Accordingly one should be buying into weakness rather than selling.
This is our general outlook for financial markets, our actual positions are available to subscribers of thedailytradingreport.com
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