We are always intrigued by “forecasts” and the perceived need to perform them at the start of each year. We are intrigued because it is common knowledge that we humans are rather hopeless forecasters, and from a financial market perspective at least, the start of January is no more significant than the start of any other month throughout the year!
It seems that we humans are simply not equipped to deal with the unknown, perhaps forecasting is merely mans’ attempt to deal with the unknown. From painful experience we learnt a long time ago not to get too caught up with what we think the market is going to do, after all the market cares little about what we think. Rather we place considerable more emphasis on trying to understand what the market wants to do. We may not know what the future holds (actually by definition we cannot know because if we did then the future would turnout different) but we do know that markets move in trends. We also know that when the trends are broad based they tend to continue. In essence we try to look for broad based themes (call them trends if it excites you) and ride them until there is enough evidence that they are about to come to an end.
Last night, for whatever reason, we saw equity markets close at multi-week highs. What is particularly encouraging is how broad based the rally in equities is. Not only did many major market indices close at multi-week highs but so too did small caps, and emerging market indices (both large and small cap indices). This behaviour suggests that the underlying trend in world equity markets is strong and we are likely to see considerable more upside over the coming weeks.
It really seems like US treasuries are fast becoming the new junk bonds! Is this because borrowing in the public sector has gone up dramatically but down in the private sector? Well that would be a logical explanation but for whatever reason the trend of outperformance of junk grade bonds relative to US treasuries is very strong so much so that junk grade bonds are trading at a multi-week high and US treasuries are frighteningly close to trading at a multi-week low! Watch for a close below 89 in TLT, we think that this will induce a dramatic wave of selling!
Just a few weeks ago one could have bought the CRB for the same level it was trading at in early August, now it is dramatically higher and trading at a multi-week high! The raggedness of the CRB chart hides the underlying bullishness of the commodity market. If one were to look at more broad based indices such as the old CRB (the CCI) you would see a more linear trend. Precious metals have been somewhat of a laggard over the last month but at least they have been able to hold above resistance levels. It is interesting to note how commodities in general have advanced over the last few weeks in light of a reasonably strong USD Index! Usually when the USD advances the CRB falters……
Is this a turning point for the USD? There is not enough evidence yet, before we get carried away on the bullish prospects for the USD we need so at least see evidence of a bottoming process perhaps a double bottom or something of the sort. So far at least the rally in December looks to be one dominated by short covering.
Basically there appears to be no change in the trends in equities, commodities, treasuries and currencies that were clearly in place by mid last year. Perhaps the biggest challenge this year will be to hold onto winning positions!
