There appears to be a general reluctance for equity, commodity and high yield currency markets to go lower, albeit they remain above significant support levels. However, the same cannot be said for the USD Index and perhaps now more importantly US Treasuries. As oversold as the USD maybe (or may in fact not be) it seems comfortable to make lower highs and lower lows. US Treasury markets now seem comfortable to make multi-day lows. They don’t have far to go before they make multi-week lows, and thereby reconfirming the bear trend that had its origins at the start of this year. We continue to be ever so aware of the explosion in the US Monetary Base and its long term implications. Keep the chart below in the forefront of your minds and let us know what you think of its long term consequences – all we can think of is inflation but with a big HYPER in front which sooner or later will lead to a blow out in treasury yields and commodity prices! But perhaps we are missing something?
The US Monetary Base (Bloomberg: ARDIMTBA:IND)
Equities
From a bullish perspective it is comforting to see major market indices and small caps hold above short term support levels. The knives seem to be out for equities with every trip they make but somehow they seem to regain their footing. This week we need to see equities close higher or else….! We are reasonably confident that enough weak hands have already been thrown out of the market.
Fixed Income
Since the start of October yields on government bonds have been rising – on a global scale. OK we have yet to see any breakouts above key resistance levels as yet but given the confirming behaviour of many government 10yr yields we think it is only a matter of days before big levels are broken in the 10 yrs of the G10 nations….The big level to watch for? The 4.0 level on the US 10yr, it that level goes a major sell signal will be generated for not only US Treasuries but also world Treasury markets. We are still rather surprised at how the junk bond market has held up. It suggests that the crowd still remains hungry for high yielding “assets”.
Commodities
Well at least commodity markets remain above key support levels. As much as we would like markets to move in a straight line it rarely happens. Anyway, the continued strength in the precious metals market, the new highs being made by inflation protected bonds relative to non inflation protected bonds, and the continued advance in shipping rates lead us to believe that is only a matter of days before commodity markets make new multi-week highs.
Currencies
The USD Index may well be oversold and we do note the growing number of “experts” who have been calling for a “bounce” in the USD Index, but to be honest we see little evidence of a breakout on a short term basis. The USD Index continues to move down making a series of lower lows and lower highs. Furthermore, it is still some way off any support worth noting (the next level of support lies at the 72 level). We have seen some weakness in the “carry trade” but this weakness has not come to anything more than retracement of strong gains made in early October. No long term support level or up trend line has been breached.
So here we go into the valley of darkness again! We will be watching the Treasury market this week like a hawk because that is where we see major trend changes occurring.
Our wealth creation portfolio is up around 19.48% 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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