The week that was………new multi-week highs in equity markets being confirmed by new highs in junk grade bonds and new lows in the USD Index (whether the weakness in the USD is coincidental to new highs in equity markets remains to be seen). The trends in equity, currency and corporate bond markets are very clear. However, the trends are far from being clear in commodity and US Treasury markets. We remain bullish on commodities and bearish on US treasuries from a fundamental perspective but to be honest one could perhaps question our orientation from a pure “technical” perspective. That being said, we still do not see any credible challenge to the trends in world financial markets that began late last year.
The Dow World index made a new high last week and has almost pegged back all its losses sustained since Lehman Bros fell over in September last year.
Small caps are vitally important to understanding the health of the rally in the major market indices. We use world small caps as a proxy for the world advance decline line. We will only begin to worry about the health of the rally when small caps show resistance in advancing along with the major market indices.
US Treasuries continue to “perplex” us! Our fundamental outlook does not support higher bond prices. For the time being at least the technical outlook neither confirms nor dispels our fundamental outlook……then shall we toss a coin? No we will stick to our bearish outlook on US Treasuries.
A new high in junk grade bonds in the US……this says so much about the underlying tone in world financial markets. Note that junk grade bonds are now higher than where they were 12 months ago…….this suggests that the “crisis” has passed.
Perhaps we have to wait until long dated US Treasuries fall over before the CRB Index (using the old 17 equally weighted methodology) moves higher. Yes commodity prices have essentially gone nowhere since the start of June, which is somewhat frustrating for commodity bulls and bears alike. However, good things take time. The CRB is closer to a bullish breakout than a bearish one.
In support of higher commodity prices is the action of the precious metals market. Gold closed above the psychological level of $1000 and silver made another multi-week high confirming its bullish breakout late last year (although to be honest it hasn’t exactly been a linear trend like copper).
The USD chart says a thousand words! We would not be surprised to see at least some strength in the USD this week but that would be seen as a better level to sell it.
Supporting the action in the USD Index is the high yield (or carry trade) proxy ETF DBV which made a higher high last week.
Into the valley of darkness we go again. Perhaps the most important level to watch for this week is the $75 level on crude. A break above would signal a continuation of the trend that began early this year which would no doubt have a significant impact on the price levels of commodities in general and perhaps US long dated treasuries.
Our wealth creation portfolio is up 16.3% 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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Nice Post.. great help…