The Daily Trading Report

It has been another generally constructive week for world financial markets with no real signs of stress worth noting appearing in any of the risk indicators that we look at. Whatever is driving macro trends in financial markets remains very strong.

We are still intrigued by the level of disbelief in the rally occurring in equity markets. It seems day after day bloggers put up a barrage of reasons as to why equity markets are about to fall over…….and the most widely read blogs are those “foretelling” of major downside to come. The popular argument is how much equity markets have advanced over the last 5 months (the Dow World Index is up some 60%), but few recognize that if you expand the horizon a few months (from March 6^th to January 1^st) then the Dow World is up a mere 20% (give or take)………20% over the course of 8 months is not exactly what we could describe as an overbought condition, given that the Dow World is still down 16% on a rolling 12 month basis.

The market is a strange “beast”………the more people talk about the market going down the less likely it is of occurring……..when the last of the “perma-bears” gives up/throws in the towel then we will know with reasonable certainty that a tradable downtrend is close in the making. Until then (and we don’t know when that point will be) we stay the course.

Equities

Multi-week highs abound! And there is broad based confirmation with a new high for the year in small cap equities. The two charts below depict the reasons why we remain bullish on world equities. However, this is not without concern. World Shipping stocks and world small cap banks remain sick to put it bluntly.

Fixed Income

The behavior of US long dated treasuries continues to perplex us! The long dated ETF TLT is down a mere 3% since March and up some 5% in the last few weeks. No breakdown in Junk grade bonds as yet, just how long can both Junk grade corporate bonds and US treasuries move in the same direction? And what is this market action telling us? Rising long dated US treasuries suggests deflation………rising junk bond prices suggests less of a chance of default which is related to expectations of a pick-up in industrial activity (growth). Can deflation and economic growth occur simultaneously? Guess we are about to find out.

Commodities

It is a bit frustrating for commodity bulls with the CRB index (representative of commodities in general) trading at the same level it was 3 months ago and from a longer term perspective the CRB is only up 8% for the year to date (so much for those who have been saying that the commodity/inflation trade is “crowded”).

Currencies

If there is any element of doubt in the behavior of the markets depicted by the charts above then the action of the world currency market should lay those doubts to rest. The USD Index is only a few pips away from a multi-week low and the high yield ETF DBV is within a few pips of a multi-week high. From a currency perspective at least “high yield” “risk seeking”, call the theme what you will, is still in vogue! Other markets should follow the behavior of currency markets.

Conclusion? Primary trends remain in place and are far from being challenged in any meaningful way (outside market noise) that is:

Bullish: equities, commodities, corporate bonds & high yield currencies.

Bearish, US treasuries, the USD and low yield currencies.

Our wealth creation portfolio is up 14.6% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

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