Equity markets at multi-week highs, equity market internal indicators at multi-week highs, junk grade and emerging market bonds at multi-week highs, industrial commodities at multi-week highs, emerging market currencies at multi-week highs, if that isn’t bullish confirming behavior what is! In addition the USD Index and US Treasuries are barely managing to hold above significant support levels, breaches of which will likely result in substantial downside, propelling risky assets even higher. There appears to be a greater force driving the prices of “risky” assets higher and whatever force it is (we could speculate for entertainment sake but we will leave that to the economists) it appears all powerful and shows no sign of abating its upward trajectory.
What bearish signs do we see out there? To be honest we are really scraping the barrel to find bearish behavior. If you were to force us to find something then it would probably have to be the lack-luster behavior of banking stocks. The KBE Bank index remains virtually unchanged in two months whilst the rest of the equity market has risen to new highs. Since it was essentially banks that got us into this mess in the first place (especially toxic monoliths like Citibank) we would be a lot more comfortable in our bullish view if the KBE Bank index were to move to a new multi-week high. Anyway if you look hard enough you will always find something that is bearish…..we are just highlighting an area of concern.
Equities
The US broad market, emerging markets and world small caps all confirm each other. Again the strength of small caps and the NYSE advance decline line is particularly comforting. If the rally was not genuinely bullish then we would certainly not expect to see the AD line and world small caps so strong…..yet for whatever reason they are, and decisively so!
Fixed Income
With the strength of emerging market and junk grade bonds it is only a matter of days before US Treasuries break to a multi-week low:
Commodities
While base metals continue to move higher we think that it is only a matter of time before the CRB Index closes at a multi-week high.
Currencies
Emerging market currencies have already moved to a multi-week high against the USD, accordingly we think that it is only a matter of time before the USD Index breaks down. Incidentally our experience tells us that problems in world financial markets usually shows up first in emerging market currencies so we place considerable importance on the behavior of the ETF CEW (and also BZF and SZR).
It is going to be an exciting week…….again we think that it all hinges around the USD. A close below 78.50 is a huge buy signal for “risky” assets. We think it will happen, probably this week!
Our wealth creation portfolio is up 14% from the beginning of the year with approximately 40% of the volatility of the S&P 500.
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